How Bundled Payments Just Might Save Health Care From Itself

In the 1960s, Texas Instruments developed the first handheld calculator. It could display up to 12 digits while performing addition, subtraction, multiplication and division. And it cost $2,200.

Since then, the calculator has come a long way. Competition forced continuous innovations, and today’s models are more lightweight, have longer battery life, are capable of performing more complex computations –all at a dramatically reduced price point.

That’s the typical cycle in virtually every sector of the American economy. Innovations are introduced, competition forces design improvements and cost reductions and products are continually improved until the next big thing comes along to start the process over again.

But that’s not the way things work in healthcare.

Like the calculator, Medicare was first created in the 1960s.

But even though the practice of medicine has changed dramatically over the last 40 years, the Medicare program has stayed largely the same. And, since most commercial insurers tend to follow the government’s lead in terms of payments and benefit design, even private markets have played a role in limiting innovations in the way we pay for healthcare.

Typically, government programs have layered on more and more regulations, sticking on band-aid policies to address new models of care delivery, new medical enhancements and new care settings. Predictably, the result looks a lot like Frankenstein’s monster – a mess of stitched together policies and competing incentives that keep healthcare in the dark ages, directly leading to waste, inefficiency and consumer frustration.

Consider just a couple examples of this dysfunction at work.

Today, many insurers have detailed lists of about 7,500 “activities” they will pay doctors to perform in service of their patients. Decades old, advancements such as email consultations with patients or electronic recordkeeping do not qualify for reimbursement.

The result has seriously retarded the practice of medicine and kept electronic communication out of the industry. Nearly every American business communicates with customers over email, yet in healthcare, only about a fifth of patients have ever emailed their doctor, and less than 2 percent say they do so regularly. Instead, we have an inefficient and antiquated way of doing business, requiring patients to make appointments and take time off work to have face-to-face office visits that could easily be conducted virtually.

Similarly, most insurers do not pay doctors to coordinate care for beneficiaries, many of whom may need hospital, outpatient, ambulatory and prescription drugs at various points in their treatment. Because providers aren’t paid to work as a team, they have no incentive to steer people toward the highest-quality, cost effective sites of delivery. And with no reliable information on cost and quality for patients, it is not uncommon for them to choose less than ideal options, such as visiting a hospital rather than seeking urgent care for a minor fall.

Clearly, we need a new way of doing things.

Last year, the Department of Health and Human Services announced a “bundled” payment program that would allow providers to bid as a team for fixed price reimbursement for common treatments, including those that require pre- and post-hospital care such as heart surgery or hip and knee replacements.

Paying for care in its entirety, rather than having providers all bill insurance companies separately, has advantages that directly benefit patients. For one, paying a fixed price for physician payment, nursing care, surgery and medications incents providers to collaborate to ensure the best outcomes – if any link in the chain fails,  that adds to the cost and providers will have to dip into their own pockets to fix it. In the case of Geisinger Health System, such financial incentives led to dramatic improvements in quality, including a 21 percent reduction in complications, a 25 percent reduction in surgical infections and a 44 percent drop in readmissions.

Similarly, paying a fixed price has been shown to lower costs. A Medicare heart bypass surgery bundled payment demonstration saved $42.3 million, or roughly 10 percent of expected costs, and reduced patients’ insurance costs by $7.9 million while improving care and lowering mortality rates. Other experts estimate that if we moved to bundling for just six chronic conditions and four conditions requiring hospitalization, providers could shave between 25 to 50% off the costs associated with avoidable complications by providing higher-quality, more collaborative care.

Our healthcare system has waited far too long to make these critical changes. Instead, we’ve been limping along, attempting to fix regulation with more regulation, which has created myriad known pitfalls for consumers, not to mention the federal budget. People and providers want to work together to improve health, but this can only be done when we start rewarding innovators who embrace flexibility and ingenuity. Bundled payments are a good start. Let’s hope for more.

Wes Champion is senior vice president of Performance Partners for the Premier healthcare alliance, a collaborative network of more than 2,600 hospitals and health systems, 88,000 other healthcare sites and 400,000 physicians.

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5 replies »

  1. The evolution of the calculator and the contribution of information technology to lowering costs, improving quality and broadening access are appropriate comparisons in a market-based economy,but that is not what we have in healthcare, as other commentators have noted.

    Self insured companies are making progress in negotiating fixed prices for bundled, high cost surgeries, Walmart being the latest to join the trend. But self insured companies have far more ability to do that than the federal government or even major health insurance companies, both of whom have constituents who have demonstrated their ability and willingness to “rule or ruin.”.

    One seductive way to help advance the underlying case for alternative payment systems is to ban the use of the word “reimbursement..” It has long since lost its meaning in healthcare–except when used by providers to justify not changing historic practices, not adopting new technology, not permitting competition (like retail clinics or nurse practitioners) and not getting paid for results.

    Ron Hammerle, Chairman
    Health Resources, Ltd.
    Tampa, Florida

  2. Bundled payments is a step in the right direction, but it doesn’t solve the problem. Unlike most any other industry, the Health Care Industry (HCI) is highly regulated from end-to-end. Competition is at least stifled and in many situations (e.g., drug patents) it is eliminated entirely.

    HCI is unique in other ways:
    – In life-death situations, the health care patient (Buyer) has no bargaining power — No price is too great).
    – Purchasing Health Care products/services is usually undesirable — From the Buyer perspective, less is better.

    With these unique characteristics, bundling payments into a solution makes sense. Payment bundles can be created for each of the 7,500 already designated solutions. Each bundled payment is periodically distributed to the Health Care Providers (Suppliers).

    The patients’ drugs, supplies, network of doctors (and other HCI personnel), equipment and facilities are all periodically pre-paid to the Suppliers. When the patient uses the Health Care System, there is no payment or co-payment made. Each Buyer’s access rights to health care are defined in an insurance (payment) plan.

    This payment model dramatically changes the market forces at work in Health Care. The Buyers needs become aligned with the Suppliers desire to make money. when the Suppliers deliver better health care to the Buyers, they make more money

    In other words, the market forces drive Suppliers to deliver better health care to the Buyers. As regulations become outdated and unnecessary, the Regulators gradually loosen their shackles. Deregulation lowers the barrier to entry into HCI. New alternatives arise, innovators drive change and the rivalry between Suppliers increases. These forces increase the Buyers bargaining power and prices drop.

    Even though the theory works, putting it into practice is nearly impossible. There are too many HCI stakeholders, who have deeply vested interests in the current payment model, i.e., the status quo. If moving this behemoth can be done at all, it will take decades.

    One approach is to enter this payment model into sub-markets. Largely self-contained pocket markets. There are many HCI Pockets, where the bundled payment model can successfully gain entry.

    One Pocket example is massage therapy. The Buyers pay directly. Rarely is the mainstream Insurance payment model utilized. Suppliers with a Bundled (Subscription) payment model can gain competitive advantage by encouraging customer loyalty. Raising the bar on continuous customer satisfaction will become necessary for the Supplier to keep and attract Buyers.

    When enough Pockets use the Subscription payment model, the market can reach a tipping point, which will transform the entire HCI.

  3. Sure, let’s get the money in one big bundle…

    Who holds it?
    Who spends it and on what?
    Who stops spending it and on what?

    This the entire debate!

    It already is in bundles. That is the problem.

    Unless and until the patient holds ALL the money he/she can spend on their own healthcare AND gets to keep that which they do not spend, it will NEVER be spent correctly.

    That is why patients bought insurance in the first place. It was never for first dollar coverage. If you did not wish to use healthcare, then you did not buy it.

    Under ACA you have bought something, but you do not need it as bundled.

  4. I think we need to do more to help patients take care of their own issues – resources, etc. If using a hand-held calculator required an “operator” to assist with calculations, perhaps it would be more expensive today than in the 1960’s to do calculating. People need to be their own or their loved one’s “care coordinator” and have access to tools to help them do so. There’s much more people can do on their own – people with complex conditions know this and do much for themselves in spite of much money added to help them – and we should enable them to take this on. If you can, it should cost less. If you don’t want to, you should pay separately for such guidance. I think this would do much to reduce healthcare costs.

    • i agree with sandra. in my opinion 50% of bundled payment is patient engagement. consider the following scenario: a medicare patients visits his PCP and the later schedules an episode of care, let’s say hip replacement, for a month from now. those who are responsible to coordinate care provide the tools and technology to allow a patient, and the patient’s family and friends, to take an active role in the healing process and establish protocols of communication.

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