Value Based Payments 101 – Bundled Payments

17 05 2013



Value Based Payment 101: Bundled Payments

In order to dive into value based payments, we need to first understand how health care is commonly paid for today and why many believe this needs to change to improve health care.  Today, most health care is paid for by private health insurance, public health insurance (Medicare/Medicaid) or by the individual, out of pocket as fee for service, essentially paying on a per procedure basis.  If you go to your doctor for a simple issue like a sore throat, there’s a line item for the office visit and exam, a line for the procedure to swab your throat, the lab fee for someone to look at the swabbing and if necessary, the prescription that needs to get filled to cure your sore throat.

This happens in a exponentially more complex fashion if you go to the doctor and she determines for example,  that you have an issue with your heart and refers you to a cardiologist, who then recommends a surgical procedure at your local hospital.  Every item is billed to someone on a line by line basis.  It’s this complexity that was the subject of the recent Time article. But to take this further, let’s say you have to be readmitted to the hospital a week after being discharged and you spend 5 extra days in the hospital, requiring treatment by new specialists as well as your cardiologist.  Who pays?  Today, the payer has to cover the costs of what was a potentially avoidable readmission.  To be fair, people are readmitted to hospitals regularly for reasons that are not anyone’s fault, but the causes of many readmissions are preventable and the costs are real.  For example, 20% of all Medicare patients are readmitted to the hospital within 30 days of discharge at a cost of $18 billion a year, not to mention the risks and impact of any hospital admission on the patient and their family.

So, how do you get this to change?  Well there are carrots and sticks.  First, the stick.  One example is that the Center for Medicare/Medicaid Services or CMS, has started a Readmissions Reduction program that was conceived as part of the health care reform legislation.  In this program, officials are reviewing the number of heart attack, heart failure and pneumonia patients who return to the hospital within 30 days of discharge. Hospitals with more readmissions than Medicare expected given their mix of patients are penalized by losing up to 1 percent of their regular payments, with penalties going up in coming years. Over 2,000 hospitals are currently expected to be impacted by reduced rates.  You can see the latest list of hospitals and their readmission rates here.  Readmission rates are coming down already, some say in direct response to the program.

Another approach to improving quality and efficiency is through “bundled payments” that are meant to encourage cooperation between all members of the medical team.  As per my example, for a hip replacement Medicare typically pays a fee to the anesthesiologist, the surgeon, the nurses, radiologists, the hospital, suppliers etc.  Under bundled payments, one sum is paid for the entire procedure based on historical data.  The goal of bundling payments is to create an incentive for all those groups to work together and find efficiencies including negotiating rates with suppliers that allow the surgery to cost less than the bundled amount and share the savings as a profit to be shared among the team members.  That’s the carrot.

The main problems with bundled payments are that some diseases like diabetes are hard to lump into episodes that lend themselves to bundled approaches.  However, many procedures and illnesses can be, like cardiac procedures and hip replacements.  So, while it may not be immediately feasible for all illnesses, it certainly can be for some.  Another issue is that there are not many providers that are willing to accept this level of risk.  This is changing as the successes that are being seen in gain more visibility.  Finally, a third reason for not doing bundled payments is the lack of software that accommodates this type of billing.  Virtually all health care billing software is designed to handle traditional fee for service approaches today, but that is a function of the fact that almost all billing is fee for service today.  The market will most certainly meet this need if and when it is necessary.

More Reading

Taking value even further when looking at new technologies and drugs.

Lessons from Medicare’s Demonstration Projects on Value-Based Payment (Congressional Budget Office)