Bundled Payments: A Cure for Fragmentation?

This article is the fourth in a series that explores different care and reimbursement models. In this series, William Rusnak, MD, provides some quick insight into several models and discusses the pros and cons of each. William's last article focused on Health Maintenance Organizations.

It is no secret that the current healthcare system could use a good lesson in coordination. To aid in this task, the Centers for Medicare and Medicaid Services (CMS) has rolled out a payment program called The Bundled Payment for Care Improvement (BPCI) initiative. Their goal is to increase accountability among providers and to improve the quality of a person’s care as they are seen by different providers. Currently, each provider issues a bill for his or her services, and unfortunately, the situation becomes quite complicated as the patient takes on a fragmented financial burden. This new program would incentivize providers to work together as a team and issue a single bill for all of the services rendered, regardless of who is involved.

What is a bundled payment?

Traditionally, when a patient is seen in a hospital, he or she is billed on a fee-for-service basis. Specialist encounters, laboratory tests, radiological examinations, meals, and supplies are all tacked to the patient’s final bill. The result is very similar to a restaurant bill, without the tip of course. Thus, under the fee-for-service model, care inadvertently turns into a focus on quantity rather than quality.

Instead of viewing a hospital visit in terms of services rendered, bundled payments allow providers to see the visit as a complete episode of care. In this model, physicians, hospitals, and post-acute providers (e.g. rehabilitation or visiting nurses) would be paid a set price for a fixed period of time, which starts at the time of the hospitalization or procedure. For example, Geisinger Health System in Pennsylvania began treating heart surgery as a comprehensive process, using evidence-based practices, then issued one bill for any care given within 90-days of the operation. The New York Times described the practice as “surgery with a warranty."

There are four different subtypes of this model, with type 2, labeled “Retrospective Acute Care Hospital Stay plus Post-Acute Care", being the most popular, especially among teaching hospitals. In this subtype, the provider is actually paid fee for service during the hospital stay and the post-hospitalization period for a specification duration of time. After that, the expenditures are compared to a target price for the entire episode and if under the target price, providers get to keep the difference. If over, providers must pay the difference to the CMS. Read about the other subtypes of bundled payments on the CMS website.

Looking at it strictly from a business standpoint, the most profitable situation would be if a patient undergoes an uncomplicated surgery, recovers completely over the next few weeks, then continues with life nearly forgetting they had surgery in the first place. This is a rare instance in healthcare where a focus on profit and quality are actually aligned. Compare that to the “more is better" situation in traditional fee-for-service or the “less is better" (nearly skimping on care) situation of past HMOs.

So who is using bundled payments? Currently, nearly 500 hospitals are piloting the bundled payment model. Most of them are academic centers, including names like Duke University Hospital, Vanderbilt University Medical Center, and Our Lady of the Lake Regional Medical Center.

What are the risks?

Most of the risk of this model is put on the providers, whether physician or hospital. Coordination is the first challenge, in that providers must be very confident in the communication between departments within their organizations. Case managers, specialists, and primary physicians need to all be on the same page. Next, providers need to set prices without underestimating expenditures. Even though most hospital visits for congestive heart failure may need a similar amount of services, a few of them may require much more. These outlier situations need to be considered when setting the target price, otherwise a few of them occurring close in time could put a system in financial ruin.

Despite these risks, many are starting to see that the overall increase in the standard of care and patient safety is well worth it. Today’s system desperately needs a model that places value on quality, cooperation, and safety. Maybe this particular strategy isn’t the final solution, but its certainly an improvement.

William Rusnak, MD's picture

William Rusnak, MD

Medical Information Advisor

William Rusnak, MD (@RusnakMD) is a resident physician in diagnostic radiology, financial investor, writer, and entrepreneur. He writes about topics such as healthcare information technology, data science, biotechnology, and prevention of chronic disease. With his involvement in several emerging healthcare companies, he is actively attempting to bridge the gap between medicine and information technology.

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