Hospitals historically have operated with a strict division of activities such that decisions that affected physicians were made separately from those impacting all other executives and staff. In fact, in many organizations, decisions that affected physicians and their practice of medicine only could be made by other physicians. However, as organizations strive to make pricing more transparent through bundling services, the cultural norms that prevent administrators from assessing and intervening in clinical decisions must be re-examined.

Administrators will face three tests of leadership as they work with physicians to develop bundled pricing, and ultimately reshape the culture of their organizations.

Reviewing Clinical Decisions

For most hospitals, the biggest cultural challenge behind bundled services is opening up clinical decision-making to examination by nonclinicians. Despite coexisting in the same facilities, administrators have focused on managing nonphysician-related activities while physicians were responsible for clinical activities. For an executive to delve into the physician realm was overreaching his or her authority, a cultural taboo. However, it is this compartmentalized way of thinking that has led, in part, to today's costly, fragmented and opaque system. Clinicians generally have not been held accountable for their spending, despite the fact that their patient care decisions make up the majority of a facility's costs.

To develop a bundled price, administrators must understand the clinical activities associated with a service to assess whether the corresponding costs are reasonable, and to make better business decisions about bundle development pricing and related quality metrics. Thus, one of the more complicated aspects of bundled pricing is that it requires that clinicians' decision-making be subject to discussion and review by administrators.

Managing Care-Path Conflict

Conflict avoidance is another cultural challenge that must be managed in developing a bundled offering. Bundles are built on clinical care paths, which will require a change in practice protocol for some physicians. As part of the process, physicians who provide care for the bundled activity must agree on what is included and excluded from the bundle and agree on the care path. This process entails getting physicians to come to consensus on treating a particular condition using a specific methodology that they may not have used previously, and agreeing that they will follow the identified care path.

One of the biggest pitfalls associated with the development of care paths is that often they are ignored. This happens when the paths are not developed at the right level of specificity or when conflicts surrounding the care decision points are not fully exposed, examined and discussed to reach an agreeable solution. A culture in which conflict is avoided enables physicians to participate in the process without fully buying in to the ideas, and the result is impaired implementation.

To ensure that the cost of services provided under the bundled offering doesn't exceed the bundled price, it is critical that physicians believe enough in the new care path to follow it. Managing conflict plays a key role in this process and starts at the top. If people at the top are afraid to deal with conflict, everyone else likely will follow, and that culture will pervade the organization.

Taking On the Outliers

Of perhaps even more importance is ensuring that your management team has the capability to have difficult conversations with physicians. Controlling costs and improving quality are a huge concern for all. Cost control is even more important, however, in the development of a bundled price.

An academic medical center in the Northeast recently underwent a bundled pricing readiness assessment. As part of the process, hospital leaders determined that the finance department could produce reports of provider charges by diagnosis-related group, or DRG. The finance department noted, however, that no one had ever asked it to generate these types of reports. When a department administrator was asked whether he would use them, he said that he didn't handle any clinical aspects of the department. When the clinical department chair was asked the same question, he said that he didn't handle any financial aspects of the department. In short, no one in the organization was managing physician-incurred costs.

Despite all the work that many organizations have done to control costs, most have not attempted to manage physician costs. This area may fall through the cracks due to the cultural norms in many institutions. The 800-pound gorilla in the room is physician cost management, and it is something that must be discussed when the conversation focuses on bundled pricing.

Part of the development of a bundled price involves the analysis of financial data related to historical costs for the activity to be bundled. In most organizations, this analysis will reveal large variances in the costs associated with delivering a particular service. After further analysis, it often becomes apparent that the variance can be attributed to the choice of medications, additional testing and other services associated with selected physicians.

Administrators must be willing to sit down with these physicians to let them know what their costs are and how they compare with the median and mean costs for the service. Even more importantly, the administrator must be able to explain to the physician why his or her costs are out of line with those of other medical faculty so that the physician can make changes to his or her practice. Organizations that have this capability will have a much easier time implementing a bundled price.

Although many hospital administrators are willing to have these difficult conversations with their physicians, some are not. Clinical decisions are the purview of the physician, in their view, and the physician knows best. A mid-sized hospital on the East Coast recently expressed interest in developing a bundled offering, but was unable to do so out of concern for violating cultural norms by getting involved in the clinical affairs of its physicians. Hospital leaders weren't ready to have difficult conversations with physicians about their practice patterns. The reality is that administrators were concerned that these conversations would result in conflict. Having these types of conversations certainly is not easy, but organizations that want to implement a successful bundled price offering must find a way to do it.

Roles Must Change

Cultural challenges that impede bundled pricing are not insurmountable. The most effective way to address them is to redefine the roles and expectations of physicians and administrators. Hospitals cannot expect to remain successful using the same strategies as before because the context within which those strategies were used has changed. Physician costs must be examined and when out of line, must be addressed. To do that, the role of the department chair must include candid conversations with physicians about their costs of care. The department chair also must work with finance to determine why particular physicians' costs are out of line with standards, and help those physicians to change their decision-making behavior unless there is a clinical reason not to do so.

In many hospitals, the chair of the department receives an administrative stipend for the additional responsibilities of overseeing the clinical aspects of the department. This leader's ability to have the necessary difficult conversations should be linked in some way to his or her compensation for that role. When physician leaders at one hospital were asked why they don't do anything about high-cost physicians, they noted that these physicians are people from whom they get referrals and with whom they have to interact on a day-to-day basis. Reconciling such conflicts of interest is part of the larger challenge of clinical alignment that hospitals need to address.

It is not just the role of the department chair that requires modification; the role of the physician must change, too. Many physicians operate as independent corporations, which is another expectation that requires modification. Older physicians, in particular, believe that the administrator should have no influence over clinical decisions, only the department chair or chief medical officer. These physicians must understand that to survive, they must work together with hospitals, not just in the same institution, but together in terms of decision-making for patient care.

In fact, the generation of physicians in training today is learning a different way of operating. They understand that hospitals are facing a multitude of external challenges that have to be managed. It is important that hospitals begin talking with their physicians about the environmental factors at work in the health care field, such as declining reimbursement and the resulting need for both cost control and avoidance. Organizations cannot change their cost structure if they don't change their decisions.

Benefits of Cultural Shifts

Openly discussing physician decisions can lead to enormous benefits for the organization. At one facility, several key physicians were surveyed about the process used to provide care for a bundled price offering. When the care path was developed, it was sent back to the physicians for review. One of the physicians reviewing the care path noted that although three different tests had been included for diagnostic purposes, only one actually was needed. He said that recent research indicated that two of the tests don't provide any more information than is obtained by doing the first test. Yet all three tests were performed, resulting in unnecessary costs, because no one ever monitored physician practice patterns.

In this era of economic retrenchment, the challenge for organizations is to redefine the roles and expectations of people within the organization to ensure that costs associated with physician decisions are treated just like the costs associated with any other decisions within the organization. That is not to say that a physician's clinical judgment will be examined, but to note that when physician costs are higher than anticipated, an analysis should be conducted to determine the reason. The department chair or administrator must be accountable for all financial aspects of the department, including those associated with clinical care, so that he or she can drive conversations with physicians. These conversations are critically important as are the analytics behind them. Physician decision-making must be examined or nothing will change.

United in Cutting Costs

Hospital trustees are responsible for assessing and improving the financial viability of the organization. In the context of bundled pricing and associated cultural challenges, trustees must ensure that the organization collects sufficient data to enable administrators to make the best decisions possible; develop policies that promote the involvement of administrators in the review of clinical decision-making; ensure that care path adoption is evaluated and monitored; and structure support and guidance for managers and physician leaders who need to build their capability for difficult conversations with physicians.

Without a process to address the consequences of clinical decision-making, hospitals are ignoring their biggest cost driver. For the most part, these costs have been off-limits from examination. For bundled pricing to work effectively, this clinical-administrative wall must come down. This is ultimately the cultural challenge in bundled pricing and, more broadly, the organizational challenge in addressing health care costs today.

Michael N. Abrams, M.A. (, is managing partner, and Simone Cummings, Ph.D., is a research analyst at Numerof & Associates Inc., St. Louis.

Health care organizations require trustees and executives to manage bundled pricing initiatives. The following skills and abilities are required:

Conflict management: Leaders need to be able to handle conflicts between physicians regarding which treatments should be included within the bundled offering. They need the ability to entertain divergent perspectives and bring people to consensus.

Business acumen: Leaders require a business perspective to ensure that they ask the right questions with regard to revenues, expenses, volume and profitability. They need to bridge the clinical and business realities that characterize the current health care environment.

Strategic vision: Leaders need to understand how to position the bundled offering for maximum impact in the marketplace. They need to understand how to build an economic and clinical value narrative to differentiate their institution. Health care background required; clinician strongly preferred.