The document discusses the transition from fee-for-service to bundled payments in healthcare by drawing parallels to the evolution of the automobile industry. It describes how early car manufacturers like Panhard et Levassor customized each car, leading to high costs and low production. Henry Ford standardized car production through an assembly line, lowering costs and increasing output. Similarly, bundled payments will require healthcare providers to standardize treatment processes and collaborate to more efficiently deliver care at a fixed cost. As with early industries, healthcare organizations that achieve standardization and efficiency will succeed in this transition period.

1. 19 SpineLine | january · february 2016 www.spineline-digital.org
Alok Sharan, MD, MHCDS
WESTMED Spine Center; Albert
Einstein College of Medicine; Stevens
Institute of Technology
Yonkers, NY
A Systems Approach to Managing the
Delivery of Health
Understanding the Transition to Bundled Payments
 Current Concepts | Issues in Health Care Management
nnn The move
toward bundled
payments can be seen
as a natural evolution
in the health care
industry as it strives
to deliver higher
quality care at a
lower cost.
In 1894, a member of the British parliament, the Honorable Evelyn Henry Ellis, wanted
to buy a car.1 He went to Panhard et Levassor (P&L) in France, which was the leading
car assembly company at that time. Ellis met with his agent from P&L and gave him the
specifications for the type of car he wanted. Using these specs, the agent subsequently
subcontracted with various other businesses to make the separate parts required for
the car. One subcontractor made the engine. Another made the chassis. And another
made the seats, etc. The various individual components were then sent to P&L where
they were subsequently assembled together into a car. Inevitably the parts would not
integrate together in a reasonable fashion leading the machinists to trim certain aspects
of the seats, chassis, engine, etc, to make them fit. The result would be a custom built car
made of the separate component parts. After a year of back and forth activities, the car
assembly was completed and later brought to England. This was the first car ever driven
in England, at a speed of 9 mph.
For P&L, this was a success story. Using a network of highly skilled subcontractors,
theywereabletobringtogethervariouscomponentstocreateacustomizedcar.Theirgoal
was not to minimize their costs or guarantee a certain quality. As each car was custom
built, no guarantee on the quality of the car could be made. Their goal was to create a
product that matched the desire of the buyer. For each subsequent car made, no attempt
was made to standardize the production of the various component parts or the process
of assembling the car.
This invariably led to the production of a low volume of cars with invariable quality
and costs. Production of these cars required a highly skilled workforce, a decentralized
processthatrequiredcoordinationbyanagent,andgeneral-purposemachinesthatcould
make any required tool or part. These factors together resulted in a low profit margin for
P&L; as volume increased there was no benefit seen with typical economies of scale. It is
commonlyunderstoodthatasproductionvolumegoesup,theunitcostofmanufacturing
an item typically goes down. For P&L, the inefficiency in the process of assembling one
car was only compounded by the increasing volume.
Henry Ford understood this problem well. His goal was volume—to sell the most
number of cars. Due to the highly customized process of making and assembling a car at
that time, automobiles were usually reserved for the middle to upper class. Henry Ford
wanted to make his car for the common man. Doing so required a fundamental change
in his management processes.
He standardized the machines that made the parts and standardized the process of
assembling the parts together. The job of the workers was even standardized to the point
where replacing a worker did not result in any problems. The assembly line was created
so that workers could stay in one spot while the various components were brought to the
worker for assembly.

2. 20 SpineLine | january · february 2016 www.spineline-digital.org
Initially when the Model T was created
it sold for $850 in 1908; by 1913 it was sell-
ing for $500. This paralleled the annual
volume increases from 82,000 to 189,000.
Certainly,avarietyoffactorsledtothiscost
decrease. There is no question, though,
that process innovation helped Henry
Ford decrease his production costs and
sell higher volumes. It wasn’t until Alfred
Sloan at GM and Eiji Toyoda and Taiichi
Ohno from Toyota challenged this process
that Ford and his company had to funda-
mentallyrethinktheirproductionprocess.
From Automobiles to Health Care
Everyindustrygoesthroughanaturalevo-
lutionovertime. Sometimestheevolution
occurs due to a particular crisis that occurs (ie, think of the
2008 banking crisis). Sometimes the evolution occurs due to
naturalcompetitionfromotherbusinesses.Andsometimesan
evolution occurs due to the changing consumer. The process
by which P&L built cars didn’t survive because it had hit a
premature point in its development and did not adapt to the
up and coming mass production process.
Health care is at a similar reflection point. The cost pres-
sures on health care are an infamous story by now. The per-
centage of GDP that is being devoted to health care with the
subsequent quality output has been discussed many times in
the lay press. The increasing dissatisfaction among patients
always makes for a good story in the newspapers. Thankfully,
a crisis similar to 2008 has not occurred in health care.
Theaverageproductioncostsforthetreatmentofapatient
with a particular disease is very high. Some of the costs can
be attributed to the fragmentation of the process required to
assemble all the different components together. Some of the
costs can be attributed to the highly skilled workers involved
in the process. And, of course, some of the costs can be attrib-
uted to the technology/pharmaceuticals required to “make”
the product (ie, good health). Currently, each individual in
the process (and sometimes the technology) is reimbursed,
leading to a lack of incentive to be more efficient. Similar to
the assembly of a car by P&L in 1894, the costs of production
are very high.
The Move to Bundled Payments
The move toward bundled payments can be seen as a natural
evolution in the health care industry as it strives to deliver
higher quality care at a lower cost. By paying a fixed price for
the“product,”theindividualsinvolvedinthedeliveryofhealth
carewillhavetolookattheiroverallproductionprocesstoac-
count for their costs. Henry Ford was able to lower his costs
through a standardization of the machines, the process and
the workers used to make a car. Automobile companies that
did standardize weren’t able to compete with the Fords of the
world. In looking at the history of other industries, it is clear
that organizations that are able to achieve
levelsofefficiencythroughstandardization
willsucceed.Inhealthcare,itisunclearhow
long this transition will take.
Individual providers will have to come
together in a collaborative fashion with
other providers as well as allied profession-
als to determine the most efficient process
to make the best product (ie, treatment of
disease). Technology will only be helpful if
it leads to further efficiency in the process
for the end user. Someone will have to
oversee the production process to ensure
the proper integration of one “component”
toanother.Otherwisethelackoffitwilllead
to subsequent inefficiency and high costs
(similar to the problems that P&L had).
How long will it take health care to reach this point? The
easy answer is that it has already begun with some hospitals
and health care systems making great strides in the delivery
transformation. Curing someone of pain from sciatica is not
like assembling a Model T. The “production process” has
many nuances that are not completely understood, and, of
course, people are not widgets. But the reality is that as pay-
ment reform moves toward a bundled payment for the treat-
ment of a particular disease, health care as an industry will
have to quickly learn the most efficient processes required to
deliver the best product. The move to bundled payments for
joint replacement by the federal government is an attempt to
accelerate that process by forcing health systems to quickly
learn what is required to do a joint replacement with the
best outcome possible, using the least number of resources.
Many organizations are looking at the technology required to
perform arthroplasty and standardizing their implants. The
transitiontobundledpaymentsisperhapsanaturalevolution
in the health care delivery process, similar to the transition
seenwiththemanufacturingofHenryEllis’cartotheproduc-
tion of the Model T.
Spine care will soon undergo a similar type of transforma-
tion. Wehaveseenmultipleattemptsatcreatingbundledpay-
ment programs for spine surgery in Sweden.2 Lack of clarity
on the outcomes that should be achieved has prevented any
implementation of a bundled type of program. Soon enough,
however, an agreed-upon acceptable outcome after spine
surgery will allow payers and the government to determine
the “production costs” for achieving that outcome allowing
themtosetanappropriateprice. Bundledpaymentprograms
in arthroplasty are designed to incentivize efficiency by mini-
mizing the use of services that do not lead to ultimate value
for 90 days postsurgery. Providers and health systems have
to ensure that their production costs are low by standardizing
equipment,implants,workers;aswelltheyhavetostandardize
their processes to reduce inefficiencies. Any major variance
fromthisprocesscanleadtounnecessarycostsanddecreased
margins.
nnn
In looking at the history
of other industries, it is
clear that organizations
able to achieve levels
of efficiency through
standardization will
succeed. In health care,
it is unclear how long this
transition will take.
 Current Concepts | Issues in Health Care Management

3. 21www.spineline-digital.org january · february 2016 | SpineLine
Current Concepts | Issues in Health Care Management 
Managingthedeliveryofhealthcareisaverycomplexpro-
cess.3 Assembling all of the necessary components, people,
andtechnologyrequiredtodeliverhighvaluecareischalleng-
ing for any industry. The reality, however, is that the health
care industry has reached a tipping point and is currently
undergoing a transformation similar to what the automobile
industry experienced in the late 19th century. Understanding
this industry transformation can help spine care providers as
they prepare for the future of health care.
References
1. Roos D, Womack JP, Jones DT. The Machine That Changed the
World: The Story of Lean Production. New York, NY;Harper
Perennial:1991.
2. Wohlin J. Value based reimbursement and initiatives in
Sweden. Available at: http://www.dssnet.dk/f/f1/Value-based-
reimbursement-and-experiences-from-Sweden.-Jonas-Wolin..
pdf
3. Sharan AD, Millhouse PW, West ME, Schroeder GD, Vaccaro
AR. Managing the delivery of health care. What can healthcare
learn from the business community? J Spinal Disord Tech.
2015;28(7):254–257.
Author Disclosure
A Sharan: Jaypee Brothers (A). Paradigm Spine (B).
Disclosure Key
Direct or indirect remuneration: royalties, stock ownership, private
investments, consulting, speaking and/or teaching arrangements, trips/travel.
Positionheldina company: boardofdirectors,scientificadvisoryboard,other
office. Support from sponsors: endowments, research–investigator salary,
research–staff and/or materials, grants, fellowship support. Other
Degree of support:
Level A. $100 to $1000 Level F. $100,001 to $500,000
Level B. $1,001 to $10,000 Level G. $500,001 to $1M
Level C. $10,001 to $25,000 Level H. $1,000,001 to $2.5M
Level D. $25,001 to $50,000 Level I. greater than $2.5M
Level E. $50,001 to $100,000
Additional Reading
The NASS Value Committee has published several articles
related to value as a key component of alternative payment
models including bundled payments. Please see these
relevant resources at:
Bartol S, Bederman SS, Bendo JA, Berven SH, Bonin AA,
Chaput CD, Dagenais S, Schoenfeld AJ. Implementing
accountable Care in spine surgery to promote sustainable
health care. 2014 NASS Value Symposium recap. SpineLine.
2015;16(2):19-22. Available at: http://www.spineline-digital.
org/spineline/march_april_2015?pg=21#pg21
Perry MS. A patient’s perspective on value. SpineLine.
2015;16(3):15-18. Available at: http://www.spineline-digital.
org/spineline/may_june_2015?pg=17#pg17
Elton D, Kosloff TM. Using big data to advance value-
based spine care. SpineLine. 2015;16(5):17-22. Available
at: http://www.spineline-digital.org/spineline/september_
october_2015?pg=19#pg19
Beringer W. Value in spine care: provider perspective.
SpineLine. 2015;16(6):16-18. Available at: http://
www.spineline-digital.org/spineline/november_
december_2015?pg=18#pg18
Paskowski I. Value in spine care: hospital perspective.
SpineLine. 2015;16(6):19-21. Available at: http://
www.spineline-digital.org/spineline/november_
december_2015?pg=21#pg21