This paper argues that improving surgical outcomes while controlling costs requires viewing surgery as one step within a full episode of care, from pre-operative optimization through post-operative recovery. We contend that Canada's current fee-for-service and block-funding models fragment this continuum, reward volume over value and misalign incentives between ministries, hospitals and surgeons. Drawing on agency theory and international bundled-payment experience, we propose an episode-of-care bundled payment made to integrated surgical programs that assume both clinical and financial accountability. We outline design options, success factors and governance requirements, and identify key policy, regulatory and cultural barriers that must be addressed to implement this model in Canada.

Introduction

A technically successful operation does not always mean a successful surgical outcome. True success depends on the entire continuum of care – from pre-operative preparation to post-operative recovery (Forslund et al. 2023). Viewing surgery as one part of a broader episode of care (EOC) encourages coordination across all stages of treatment, leading to safer, more consistent results.

The traditional fee-for-service (FFS) physician payment model discourages this integrated approach (Reindersma et al. 2022; Shih et al. 2015). By paying separately for each service, FFS fragments care and limits teamwork among providers. This system rewards volume rather than value, contributing to inefficiencies, variable outcomes and higher costs.

A shift to a bundled, episode-based payment – a single payment covering all services within a defined surgical episode – aligns incentives toward collaboration, quality and efficiency. Such a model encourages shared accountability for patient outcomes while reducing overall system costs.

This paper examines why an EOC-based payment model should be implemented for surgical care in Canada. It outlines the key principles underlying this approach, explores its potential advantages and discusses how a transition to this model could be effectively achieved.

Theory Underpinning an Episode of Care-Based Approach to Surgical Care

The central idea behind an EOC approach is that coordinating every part of the surgical experience – from pre-operative preparation to post-operative recovery – produces better, more predictable outcomes and lowers costs (Press et al. 2016; Scalise and Jacofsky 2017). This coordination is best achieved by changing how surgical care is funded. A bundled payment model provides a single payment that covers all services within a patient's surgical episode, typically spanning several months (Struijs et al. 2020). The payment is made to a designated EOC-based surgical program that organizes clinicians, facilities and resources under unified leadership, ensuring that all contributors are aligned toward achieving optimal outcomes.

A defining feature of this model is its built-in financial accountability. If total costs exceed the bundled payment, the surgical program absorbs the loss; if care is delivered efficiently and effectively, the program retains the savings (Barnett et al. 2019; Glickman et al. 2018). This creates powerful incentives for coordination, efficiency and quality – unlike the FFS model, which rewards the quantity of services rather than the value of outcomes. In an EOC framework, complications and inefficiencies are financially penalized, encouraging collaborative care and continuous improvement.

Applying agency theory to surgical care

Agency theory helps explain why a bundled payment model better aligns incentives within surgical care. In this framework, the principal (the ministry of health) contracts agents (physicians and hospitals) to deliver services (Pontes 1995). Under the current FFS and block-funding system in Canada, these agents operate with differing priorities (Figure 1A) – physicians are rewarded for procedure volume, while hospitals manage fixed budgets – leading to fragmented, inefficient care that often diverges from the principal's objectives of quality and cost-effectiveness. A more efficient approach in line with agency theory would be to have the principal (ministry of health or their designate) work directly with specific agents (surgical programs) that represent all of the elements required to deliver optimal surgical care to specific cohorts of surgical patients (Figure 1B).

Proposed Structure for Organizing Surgical Care in Canada Through an Episode of Care-Based Surgical Program

Reimagining the delivery of surgical care in Canada based on agency theory and the advantages of an EOC-based approach would offer the potential for notable improvements in surgical volumes, clinical outcomes and financial performance. The ministry of health (or designate) would remain the principal but would contract with agents in the form of integrated surgical programs.

Negotiated contracts with surgical programs would designate a volume of surgical cases to be performed over a set period (e.g., 12–24 months) and a per-patient “bundled” price. Negotiated procedures to be performed could be very specific (e.g., primary total knee replacement, endoscopic sinus surgery, etc.) or represent a category of surgeries (e.g., foot surgeries, abdominal surgeries, etc.) with an expected breakdown of surgical types. Surgical programs could take on multiple contracts for different types of procedures if they had the capacity and inclination to do so. In addition, payments based on the risk stratification of patients would be eliminated or minimal. With a high volume of surgical patients, it would be expected that only 2–3% of patients would fall outside of the normal spectrum of patient risk factors (e.g., an elderly person who suffered a hip fracture requiring a total hip replacement). Payment for these outlier patients would be through the traditional FFS payment model or by a separately negotiated carve-out rate. Any surgical program that was identified through statistical methods or other means as cherry-picking surgical patients would be subject to severe financial penalties or program termination.

Each surgical program would consolidate accountability by functioning as a single agent responsible for both clinical and financial outcomes. Each surgical program would be composed of physicians, allied providers, support staff and surgical facilities – all under the same administrative and financial umbrella. Programs would be bound by performance metrics, such as surgical volumes, complication rates and patient satisfaction, which are clearly defined in the funding agreement. The leader of each surgical program would be responsible for:

• Obtaining and maintaining appropriate surgical facilities: Surgical facilities could include: (1) existing hospital operating facilities with hospital program leadership; (2) surgical centre facilities with the program led by the facility's leadership; or (3) hospital or surgical centre facilities contracted out to a program led by physicians or another suitable leadership team.
• Assembling the surgical care team: The surgical program leader would need to assemble the requisite clinical team including surgeons, anesthesiologists, nurses and other support staff. Physicians would be hired from among licensed physicians within the province based on their ability to perform at a high level and function as an integral member of the team. They would be paid the existing provincial rates for their clinical care but would also be eligible to be paid additional amounts for their administrative and leadership role within the teams. A licensed physician would have no right or expectation to be selected to join a surgical program. Those not offered employment within this model would still be able to work within the existing traditional health system framework. Nurses and support staff would be paid based on provincially negotiated rates and their terms of employment would need to adhere to existing provincial negotiated or legislated work regulations. They would also be eligible for additional employment compensation for non-clinical administrative or leadership roles they might serve within the surgical program.
• Ensuring that clinical care is coordinated and provider incentives are aligned: A key element of this proposed model is that of coordinating care. Removing duplicate and unnecessary services and implementing modern continuous improvement strategies will ensure the highest quality clinical care at a low cost. The leadership of the surgical program will be responsible for creating and maintaining an environment where these results can be achieved. Reorganizing the workflow and organizational structure to ensure that individuals work as a part of a single team rather than in traditional isolated departmental silos will be a critical element to achieving this goal.
• Accurately measuring and reporting process and outcome metrics: Surgical program leadership will need to ensure that the measurement of both process and outcome metrics is built seamlessly into the patient workflow. Appropriate pre-operative assessment and the mapping of post-operative progress will be needed to optimize each patient's results. Metrics to support an effective continuous improvement program will be expected. Clinical results and assessment of complications, program financial performance and provider satisfaction will need to be measured and reported to the ministry of health or another designated principal.
• Optimizing the program's financial performance: Financial performance of each surgical program will be predicated on an efficient flow of surgical patients, eliminating extraneous expenses and avoiding complications that increase costs and negatively impact patient outcomes. It will be up to the leadership of each surgical program to optimize their program to ensure that they are financially viable.

Bundled Payment Models

Bundled payment models for surgical care can be structured in three main ways: prospective, retrospective and hybrid.

In a prospective bundled payment model, a single lump-sum payment is provided to the EOC program before the surgical episode begins. The program is then responsible for covering all costs – such as surgeon and anesthesia fees, nursing, facility expenses and hospitalization – within that set amount. This model, though less common, is occasionally used in private healthcare systems where providers have greater control over resources and costs.

The retrospective bundled payment model sets a target bundled price for each surgical episode in advance, but care providers continue to be paid through the traditional FFS system during treatment. After the episode concludes, the total actual costs are compared with the target price. If the care costs less than expected, the program keeps the savings; if it costs more, the program reimburses the payer for the difference. This shared-risk model has been widely implemented in the US through the Bundled Payments for Care Improvement initiative (Agarwal et al. 2020; Dummit et al. 2016).

A hybrid model combines aspects of both approaches. Some fixed costs – such as facility fees and staff salaries – are paid prospectively, while variable costs, such as physician and anesthesia services, are reconciled retrospectively. While the accounting methods differ, the central goal remains the same: aligning financial incentives with coordinated, efficient and high-quality care delivered within a predetermined bundled cost. The proposed surgical program model would likely require this type of hybrid model, at least initially.

Principles Required for Success in a Bundled Payment Model of Surgical Care

A bundled payment model for surgical care creates an environment where programs compete on quality and efficiency rather than volume. High-performing programs are rewarded for achieving better outcomes at lower cost, while underperforming ones face financial penalties or discontinuation. Success in this model depends on several key principles.

Clear surgical program leadership

Strong leadership is critical for both the surgical program and the overarching health system. Each EOC-based surgical program should have a designated leader responsible for clinical and financial outcomes, coordination of care providers and ongoing quality improvement. This leader must have the authority to redesign care pathways, manage personnel and dismantle traditional departmental silos to ensure integrated and patient-centred care.

High surgical volumes

High volumes of similar surgical cases foster improved efficiency, standardization of care and financial stability. Larger case numbers reduce variability in outcomes and allow economies of scale. Conversely, low-volume programs face greater financial risk as isolated complications can disproportionately affect overall performance.

Accurate outcome and cost measurement

Comprehensive and transparent measurement of outcomes is essential. Programs must track pre-operative risk factors, surgical outcomes, complications, patient satisfaction and total costs. Data should be validated externally and accessible to both program leaders and payers. Monitoring provider satisfaction also helps sustain engagement and program quality over time.

Agility and adaptability

EOC programs must remain nimble – able to quickly implement process improvements and respond to performance data. Flexibility in leadership and operations supports continuous learning and rapid problem-solving, which are critical for long-term success.

Strong health system oversight

Effective payer-side leadership ensures fair competition and accountability. Health systems should select programs transparently, set benchmark costs and negotiate bundled prices that reflect case complexity. In addition, payer-side leadership must ensure that surgical programs align with broader population health goals, integrating preventive and post-acute care within the surgical continuum.

By adhering to these principles – strong leadership, sufficient surgical volume, accurate measurement, adaptability and robust oversight – bundled payment models can deliver high-quality, cost-efficient surgical care while fostering accountability and innovation across the healthcare system.

Barriers and Potential Solutions to Introducing Successful Episode of Care-Based Surgical Programs in Canada

Implementing EOC-based surgical programs within Canada's existing healthcare framework presents significant challenges. Recognizing these barriers and developing practical strategies to address them will be essential for success.

Lack of strong health system leadership

Canadian healthcare governance is fragmented among ministries, regional authorities, hospital chief executive officers, unions and professional associations, leaving limited coordinated leadership to drive reform. EOC programs require decisive payer-side leadership capable of making evidence-based funding decisions, rewarding high-performing programs and discontinuing ineffective ones.

Solution: Establish a dedicated provincial organization – either a new ministry division or an independent Crown corporation – to oversee EOC-based programs. Led by an empowered executive team and guided by a bipartisan board, this body would manage funding, monitor outcomes and ensure a population-based approach to surgical care.

Limited population-based planning

Successful EOC programs depend on high surgical volumes, achievable only through population-level planning. Currently, Canada lacks structures that coordinate care across disease pathways – resulting in fragmented delivery and uneven access.

Solution: Mandate the EOC oversight body implement population-based models for common conditions (e.g., arthritis, cancer). This approach would standardize pathways for both surgical and non-surgical patients, shorten wait times and create concentrated surgical volumes necessary for efficient EOC operations.

Lack of competition in care delivery

Block hospital funding provides a limited incentive for efficiency or innovation. Without competition based on quality and cost, there is limited motivation to improve.

Solution: Allow multiple entities – including hospitals, physician-led groups and accredited surgical centres – to compete to deliver EOC-based programs. Funding must be transparent, separated from other hospital budgets and subject to consistent regulatory oversight to ensure fair and accountable competition.

Transitioning funding away from block budgets

Financing EOC programs will require reallocating funds from existing hospital budgets rather than adding new resources. Resistance from hospitals is likely, particularly given the shift toward performance-based funding.

Solution: Gradually reallocate surgical funding to EOC programs, rewarding efficient, high-performing organizations with additional resources while holding underperforming ones accountable. This transition can achieve cost savings or enable more surgeries within existing budgets.

Introducing a new payment model

Current physician FFS and hospital block funding models are incompatible with a unified bundled payment system. Moreover, hospitals have not traditionally faced performance-linked financial risk.

Solution: Adopt a hybrid bundled payment model combining prospective and retrospective elements. Facilities would receive upfront payments for surgical and staffing costs, while physician FFS payments and variable costs (e.g., readmissions) would be reconciled retrospectively. This approach balances accountability with operational flexibility.

Misalignment with system-wide contracts

Existing collective agreements and negotiated fee schedules may not align with the incentives required for EOC programs.

Solution: Recognize dual roles for providers – clinical services (e.g., surgical operations) and program leadership – and compensate accordingly. Variable pay, stipends or performance bonuses tied to EOC outcomes can align provider motivation with program success, rewarding efficiency and high-quality care.

Lack of transparent cost data

Canada's block-funding structure obscures true service costs, limiting accurate financial oversight. EOC programs require precise, real-time data to assess performance and drive improvement.

Solution: Mandate transparent cost accounting and give EOC leaders access to detailed payment and facility cost data. Hospital cost structures must be shared and standardized to ensure equitable pricing for all participating entities.

Resistance to systemic change

Canada's healthcare culture is historically resistant to disruption. Established processes, power structures and comfort with the status quo make large-scale reform difficult.

Solution: Implement a deliberate, phased transition over five to 10 years. Begin with pilot programs built from the ground up rather than adapting existing structures. Strong leadership, political commitment and sustained administrative support will be critical for long-term success.

Canada's transition to an EOC-based model for surgical care will require overcoming deep-rooted structural, financial and cultural barriers. Success depends on strong leadership, transparent funding, performance accountability and a long-term, population-focused vision. With careful planning and political will, Canada can move toward a more efficient, outcome-driven surgical care system that improves quality while reducing costs.

Policy and Regulatory Changes That Will Be Required for Implementation

There are a variety of policy, administrative and possibly regulatory changes that will need to be enacted to institute the EOC-based approach to providing surgical care that has been outlined. Specifically, a province wishing to introduce this type of program into its health system will need its ministry of health to:

1. Establish an independent and stand-alone entity to administer these surgical programs. This may require a legislative mandate from the provincial government. This governing entity could be a separate division of the ministry of health or an independent Crown corporation. It will need to be at arm's-length from the ministry of health. A qualified bipartisan board of directors will need to be appointed to oversee this organization's leadership.
2. Establish a clear mandate, including population-based surgical goals, to guide the mission of this entity.
3. Hire via a competitive process a strong independent leader to oversee the governing entity.
4. Enact a policy, possibly requiring government legislation, to allow non-traditional entities (physician-led groups, or surgical centres, etc.) to lead an EOC-based surgical program.
5. Appropriate funds to finance this program. These funds should come from the existing budget. Specifically, they should be taken from the block funding of existing hospitals performing the desired surgical care.

Conclusion

Surgery should be viewed as a key event in the patient's larger EOC. FFS payments encourage a fragmented, individual-oriented approach to care delivery rather than a cohesive, team-based model. In addition, block funding of hospitals performing surgeries stifles innovation and prevents accurate cost accounting of surgical operations. Transitioning to a bundled payment model to fund surgical care in Canada would create a powerful driver to improve surgical outcomes, reduce per-case costs, minimize variations in care and support a population-based approach to surgical care. Bundled payment models require surgical programs to compete based on quality and cost, fostering greater efficiency. For success, such programs require strong leadership, accurate pre-operative patient assessment, effective outcome measurement, a high volume of similar cases and the agility to implement necessary changes. In Canada, entrenched FFS structures and block hospital funding pose challenges to this transition. However, strategic policy changes and committed leadership can drive the shift toward an EOC model. With this transformation, the Canadian healthcare system could achieve significant improvements in the quality, efficiency and affordability of surgical care.

Correspondence may be directed to Stephen Pinney by e-mail at: sjpinney@orthoeducation.com.

Améliorer les résultats chirurgicaux tout en réduisant les coûts : arguments en faveur d'un modèle de paiements groupés pour les épisodes de soins chirurgicaux

Résumé

Cet article soutient que pour améliorer des résultats chirurgicaux x tout en contrôlant les coûts, il faut considérer la chirurgie comme une étape dans un épisode complet de soins, allant de l'optimisation préopératoire jusqu'à la récupération postopératoire. Nous soutenons que les modèles canadiens actuels de rémunération à l'acte et de financement global fragmentent ce continuum, récompensent le volume plutôt que la valeur et provoquent un désalignement des mesures incitatives entre les ministères, les hôpitaux et les chirurgiens. En nous appuyant sur la théorie de l'agence et sur l'expérience internationale en matière de paiements groupés, nous proposons un paiement groupé par épisode de soins effectué dans le cadre de programmes chirurgicaux intégrés qui assument à la fois une responsabilité clinique et financière. Nous décrivons les options de conception, les facteurs de réussite et les exigences en matière de gouvernance, et nous relevons les principaux obstacles stratégiques, réglementaires et culturels qui doivent être surmontés pour mettre en œuvre ce modèle au Canada.

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