A “bundled payment” is a term that refers to a single, global payment for an “episode” of care. Currently, the most common episodes are orthopedic surgical procedures (e.g. hip and knee replacements), but can include a pregnancy, a colonoscopy or even cancer.

As bundled payment programs become more common in healthcare, both the Federal and State Governments should grant “Bundlers” the right to obtain a lien on the awards in medical malpractice cases attributed to the complication expenses that Bundlers incur. One way to achieve this goal is through the Collateral Source Rule.

By way of example, if a patient undergoes a total hip replacement surgery under the traditional fee-for-service model, that patient’s insurance company would be billed separately by the anesthesiologist, the nurses, the hospital, the surgeon, the skilled nursing facility, the pharmacy and the home health agency, among others. Under the ideal bundled payment model, a single party, the “Bundler,” would receive one global payment from the insurance company. The Bundler would then be responsible to pay all the providers along the continuum of care for a set period of time (typically from the date of surgery to 90 days post-operative). If the Bundler successfully contains the costs associated with the episode, it will realize the profit margin between the amount paid by the health insurance company and the actual expenses. In the event of a complication that increases the total costs associated with the episode, the Bundler must absorb these costs, and would likely incur a financial loss.

Presently, the healthcare industry is not equipped to implement the ideal bundled payment model. Under the current model, the Bundler simply assumes financial responsibility for the upside profits and downside risk of the bundle payment – based upon the contract rate. For example, if an orthopedic practice’s rate is set at $25,000 for a total hip replacement procedure, the practice will realize the savings below, and absorb the costs above, $25,000 on any individual procedure.

The Collateral Source Rule is a rule that prevents the introduction of evidence of insurance (or any other “collateral source” of payment) in a negligence lawsuit, as it may unduly influence a jury. If a jury knows that a defendant’s insurance would cover an indemnity award, the jury may be inclined to issue a verdict for the plaintiff. Conversely, if a defendant introduces evidence that a plaintiff was not financially harmed by the defendant’s wrongdoing because insurance already covered the damages, the jury might not find the defendant liable.

Regarding medical expenses in medical malpractice awards, the collateral source rule has been used by States to determine which party should incur the cost of medical expenses, and which party can recover them. As bundled payment models continue to expand throughout healthcare though, the collateral source rule can result in a double penalty to providers who assume both the financial and liability risk of providing medical care.  Providers that assume the payment risk of medical complications through bundled payments can resolve many of the questions addressed by the collateral source rule, but only if State law permits them to place a lien on medical negligence awards attributed to the care associated with medical complications.   Ex: John underwent a hip replacement surgery performed by an orthopedic surgeon who is employed by a group that received a “bundled payment” of $25,000 for the procedure and all associated expenses for 90 days post-op. John experienced a complication and was admitted to the hospital. The total expenses related to the hip replacement episode were $100,000, which was charged to the orthopedic group (assuming John was not financially responsible for any portion of the expenses through a co-pay, co-insurance or a deductible).

Assuming the group placed a proper lien on the $200,000 award, it would be entitled to recoup $75,000 ($100,000 less the $25,000 bundled payment the group already received).

Questions Addressed by the Collateral Source Rule:

1. Health Insurer or Liability Insurer?    Some states rely upon the collateral source rule to prevent third-party subrogation (including by health insurers) in medical malpractice cases. Thus, if a patient receives a medical malpractice award for $200,000, $100,000 of which was attributed to medical expenses paid for by a health insurance company, the health insurance company would not have the right to be reimbursed by the liability insurer (see Perreira v. Rediger). Courts that interpret the collateral source rule this way tend to justify it by pointing to the history of liability insurance availability and affordability problems in the US.  Other states permit subrogation, by allowing health insurers to obtain a lien on medical malpractice awards attributed to the medical costs they paid out. Regardless of state law, the federal government (CMS), will assert a lien on these amounts and collect them accordingly.    However, when providers assume financial risk, they are placed in the unique role of both health insurer and liability insurer (as the premium payer, providers are indirectly liable for expenses paid by the liability insurer; many providers even share liability risk with insurers or reinsurers). Without a recognized right of subrogation, these providers could pay twice.

Complications are a recognized reality in medicine – even in the absence of negligence. By assuming the financial risk of complications, providers are incentivized to look beyond the compartmentalized care that they might otherwise deliver and coordinate care on a much deeper level. While these new incentives, which can lead to better investments and stronger partnerships, can significantly drive down the costs and risks inherent in healthcare, they cannot prevent all mistakes from occurring. This reality is precisely why we have a tort system with a highly evolved medical malpractice framework. Complications caused by negligence should be treated separately from ordinary complications. When negligence is properly established, the liability insurance company should respond accordingly.    Providers that bear the financial risk of complications through bundled payment programs should be permitted to recoup these amounts from a liability insurer. Otherwise, they will suffer a double-penalty – incurring the expenses of a complication and paying the costs (either directly through deductibles and quota shares, or indirectly through premiums) of a negligence suit.

2. Plaintiff or Insurer?   Some states allow patient-plaintiffs to recover medical expenses as part of a settlement or award. Under a bundled payment program, where providers themselves are already responsible for paying the expenses, it would be unreasonable to make them then pay that amount, again, to the patient who did not pay the bills in the first place (of course, plaintiffs should not be prevented from recouping co-pays, deductibles or co-insurance). If the care was part of a bundle payment program, the amount of the award or settlement attributed to the medical expenses should be returned to the risk-taking provider(s). Bundlers should be able to obtain a lien on the damages attributed to medical expenses paid.

3. Billed Amount or Paid Amount?    In states where plaintiffs are permitted to be compensated for medical expenses paid by health insurance companies, the question remains: How should these expenses be calculated? Some states allow for only the amount that the injured party would have to pay (the “negotiated rate”); others permit patients to receive the full amount billed by providers, even if those providers expected only to collect a fraction of such “billed rate.”     Bundled payment models can eliminate the confusion between the amount billed and the amount paid, as bundled fees are more transparent and often set in advance. Moreover, paying for the medical expenses associated with complications is a fundamental aspect of bundled payments. In the event a complication rises to the level of a professional negligence lawsuit, these expenses should not be duplicated, they should be transferred.

Placing the medical expenses of a professional liability suit with the professional liability insurer would also force the industry to consider provider risk more globally – further aligning interests throughout healthcare. In fact, many professional liability insurers are exploring offering “stoploss” coverage as part of their product portfolio. Rightfully placing the complication expenses associated with a negligence suit with the professional liability industry would accelerate these efforts and create further efficiencies throughout the marketplace. Indeed, legally blessing such a set off would be ingenious.

The fee-for-service system that has dominated healthcare in the United States for decades is transitioning to a value-based system. Underlying this movement is the recognition that a feefor-service system creates the wrong incentives. The foundation of the value-based care system is the principle that providers should not only be compensated for performing procedures or providing treatment, but also for preventing patients from needing expensive care in the first place. In the bundled payment context, the Bundler is not necessarily the party that gets paid to treat the complications (i.e. the surgeon gets paid only for the surgery), yet is the party that ultimately pays for them.      By distinguishing a general complication from negligence, the healthcare system can take another step to properly align interests and achieve better, more affordable care. Evolution requires constant adaptation, and the advent of bundled payment models demands that the medical negligence system adapt with it. As the risk-taker, Bundlers deserve to have the same subrogation rights that CMS and many private payors enjoy.

For more information, please contact Brian Kern, info@deepriskmanagement.com.