Baptist Health System, a clinically integrated network of five hospitals in Texas, has taken part in Medicare’s knee replacement bundled payment programs since 2008. Medicare began bundled payments in the hope that its costs (the amount it pays doctors, hospitals, nursing homes, and rehabilitation centers) would go down. Baptist Health System also sought to improve quality and reduce costs, thereby gaining  a competitive advantage (Navigant 2016).

It seems that both parties got what they wanted. Average Medicare payments per knee replacement without complications declined by 21 percent between 2008 and 2015 (Navathe et al. 2017). However, Baptist Health System’s cost per case declined by 25 percent, primarily because of reductions in implant and rehabilitation costs (Navathe et al. 2017). In addition, outcomes appeared to improve. Episodes with readmissions decreased from 6.4 percent to 5.0 percent, episodes with emergency department visits decreased from 7.4 percent to 6.5 percent, and episodes with prolonged stays decreased from 22.4 percent to 7.3 percent (Navathe et al. 2017). Overall, Medicare spent less, Baptist earned a higher profit margin, and patients got better care.

Discussion Questions

• This case includes two perspectives on costs. Which is correct?

• How did participating in the bundled payment change Baptist’s perspective on costs?

• Did Baptist reduce both marginal and average costs?

• Did Baptist gain a competitive advantage as a result of these changes?

• Baptist reduced implant costs by 29 percent. How could it do this?

• Baptist reduced rehabilitation costs by 27 percent. How could it do this?

• Was Baptist Health System efficient in 2007?

• Whose revenues fell as a result of the changes that Baptist made?