Bundled Payments Are Back – And This Time, Hospitals May Not Be Ready

For several years, bundled payment models appeared to be receding into the background, overshadowed by the rapid expansion of Medicare Advantage and Medicaid supplemental payment programs.

That is now changing.

With the introduction of the Transforming Episode Accountability Model (TEAM), the Centers for Medicare & Medicaid Services (CMS) is quietly reintroducing mandatory episode-based reimbursement—this time with broader reach and higher stakes. The new mandatory model started January 1, 2026, and runs for five years through December 31, 2030. The first reconciliation impacts will show up mid to late 2027.

A Different Starting Point

The re-emergence of bundled payments comes at a time when hospitals are already operating under intense margin pressure. Medicare payment updates continue to lag inflation, labor costs remain elevated, and supplemental funding streams—particularly Medicaid State Directed Payments (SDPs)—are now facing federal caps.

The Core Challenge: Control Without Authority

Post-acute care providers, including skilled nursing facilities and home health agencies, play a significant role in determining total episode cost. Yet hospitals frequently lack the contractual leverage or operational integration needed to effectively manage these downstream providers. Similarly, physician behavior—particularly among independent surgeons—remains a major driver of cost variability.

This creates a fundamental tension: hospitals bear the risk, but do not fully control the inputs.

Physician Alignment Becomes Critical

If there is one area where hospitals must adapt quickly, it is physician alignment. Under bundled payment models, variation in physician practice patterns becomes a direct financial liability.

Length of stay decisions, implant selection, discharge planning, and post-operative follow-up all influence total episode cost. Without meaningful alignment—whether through co-management agreements, gainsharing arrangements, or employment models—hospitals will struggle to manage performance under TEAM.

This is particularly challenging in markets where physicians remain highly independent. In those environments, hospitals may find themselves exposed to risk with limited ability to influence outcomes.

Data: The New Margin Driver

Success under TEAM will depend heavily on data—specifically, the ability to measure and manage cost at the episode level.

Many hospitals continue to rely on retrospective financial reporting that is not designed for bundled payment environments. Under TEAM, organizations will need near real-time visibility into the following:

• Episode-level cost trends
• Post-acute utilization patterns
• Physician-specific variation
• Readmission and complication drivers

For organizations that have invested in analytics infrastructure, this presents an opportunity. For those that have not, it represents a significant vulnerability.

The Risk of Unintended Consequences

As with any payment reform, there is a risk that financial incentives may drive unintended behavior. Hospitals under pressure to reduce episode costs may seek to limit access to certain high-risk patients or steer patients toward lower-cost post-acute providers regardless of clinical appropriateness.

Regulators will be watching closely, but the operational reality is that financial pressure will influence decision-making. The challenge for hospitals will be balancing cost management with quality and compliance.

A Return to Fundamentals

In many ways, TEAM represents a return to core principles of healthcare delivery: coordination, efficiency, and accountability. However, the context is very different from when bundled payments were first introduced.

Looking Ahead

For hospital leadership, the message is clear: episode-based accountability is no longer optional. Organizations that fail to adapt will find themselves exposed—not only to financial losses under TEAM, but to a reimbursement landscape that increasingly rewards efficiency and punishes variation.