Health Care Reform: Creating a Sustainable Health Care Marketplace

By Hewitt Associates
Business Roundtable
November 2009

Payment Bundling

Establishing bundled payments would create more incentives for efficient treatments and could be adjusted based on outcomes. Health care reform proposals are moving toward bundled payments. Both the House and the Senate include provisions that focus on improved quality of care and patient outcomes.

The pilot program may cover the following services: acute-care inpatient hospitalizations; physician services delivered inside and outside of the acute-care hospital setting; outpatient hospital services, including emergency department visits; services associated with acute-care hospital readmissions; home health; skilled nursing; inpatient rehabilitation; and long-term care. The episode of care established in the pilot program would start three days prior to a qualifying admission to the hospital and span the length of the hospital stay and 30 days following the patient discharge.

The pilot program’s bundled payment would be made to a Medicare provider or another entity composed of multiple providers to cover the costs of acute-care inpatient and outpatient hospital services, physician services, and post-acute care. The bundled payment for each of the eight selected conditions would be based on the average hospital, physician, and post-acute-care payments made over the hospitalization period for the patient.

CBO does not score savings for this provision, mainly because the language above suggests that Medicare will pay the same as it would otherwise have paid, instead of some lower amount per episode. Over time, however, we believe substantial savings can be achieved by both removing the financial incentive to provide marginally effective services, as well as through the active management of the rate of increase in the bundled reimbursement rate.


Controlling U.S. Health Care Spending — Separating Promising from Unpromising Approaches

By Peter S. Hussey, Ph.D., Christine Eibner, Ph.D., M. Susan Ridgely, J.D., and Elizabeth A. McGlynn, Ph.D.
The New England Journal of Medicine
November 11, 2009

We identified 8 options that evidence suggests have the potential to reduce spending and are broadly applicable to the United States. For these options, we developed high and low estimates of cumulative cost savings over 10 years. The graph (clink on link below) lists the options, ranked according to their savings potential, and shows the percentage change in spending that we estimate could be achieved if that policy alone were implemented.

Among the most promising options are those related to changing the payment methods for health care services. (In the graph, bundled payment stands out as the option that would have by far the greatest impact in reducing spending.)

A “bundled-payment” approach would provide a single payment for all services related to a given treatment or condition, causing providers to assume risk for preventable costs; this approach has proved effective in limited demonstration projects. Bundled payment provides a mechanism for reducing both the volume of services and the prices charged for them. We estimate that under optimistic scenarios and with broad use of the Prometheus model of bundled payment for six chronic conditions and four acute conditions or procedures requiring hospitalization, national health care spending could be reduced by 5.4% between 2010 and 2019. This estimate assumes that providers can achieve a reduction of 25 to 50% in the costs associated with avoidable complications by providing higher-quality, more collaborative care.


Building a Bridge from Fragmentation to Accountability — The Prometheus Payment Model

By François de Brantes, M.S., M.B.A., Meredith B. Rosenthal, Ph.D., and Michael Painter, J.D., M.D.
The New England Journal of Medicine
September 10, 2009

Most experts agree that some sort of bundled, episode-based payment would help to move the system in the right direction. Our own approach, the Prometheus Payment model, for instance, bundles services and provides a budget with three components: evidence-informed base payment with patient-specific severity adjustments and an allowance for potentially avoidable complications.

The model encourages two behaviors that fee for service discourages: collaboration of physicians, hospitals, and other providers involved in a patient’s care; and active efforts to reduce avoidable complications of care (and the costs associated with them). It accomplishes these goals by paying for all the care a patient needs over the course of a defined clinical episode or a set period of management of a chronic condition, rather than paying for discrete visits, discharges, or procedures.

When incentives are used to drive changes in behavior, it is important that people and organizations are held accountable only for the variables that are actually under their control. That’s why, in designing the Prometheus model, we decided to focus on the potentially avoidable costs of patient care. We separated the costs attributable to patient-related factors from those attributable to providers’ actions. These latter costs are critically important in terms of accountability. In Prometheus, these potentially avoidable costs are called PACs and are recognized as the result of “care defects” — problems necessitating technical care that are under the professionals’ control and that, with the best professional standards, could have been avoided. PACs might include the cost of hospitalization of a patient with uncontrolled diabetes or the readmission for a wound infection of a patient who had recently been discharged after cardiac bypass surgery.

Unlike the current payment system, Prometheus provides larger profit margins for providers who can eliminate these complications, since they keep any unused PAC allowance — they profit by delivering optimal care, not a greater volume of care.

One lesson from our pilots is that hospital-centric provider organizations can expect increased internal tension when they implement an episode-of-care payment system. Prometheus does provide a sort of bonus to the hospital and physicians for working together to avoid readmission. However, physician groups that are paid under the model for managing chronic conditions have substantial opportunities to increase the profits that come from avoiding expensive hospitalizations. This incentive can highlight potential conflicts between the financial interests of physicians and those of hospitals and cause us to question the proposition that hospital-centric provider organizations will deliver the best results for the country.

The Prometheus model, by contrast, can be implemented in a fragmented, largely fee-for-service delivery system if the payer retains the role of financial integrator. Over time, as providers collaborate to improve patient care and optimize their margins, they could more formally integrate into accountable organizations. However, it will and should be their choice to do so.

Peter Hussey and his colleagues at RAND, in their NEJM article, try to make the case that a “bundled payment” approach would be one of the most promising options for controlling health care spending. The Prometheus model of bundled payment, described the other NEJM article cited above, would shift the risk for preventable costs from the payer to the providers of health care services.

Here’s how it would work. The payer (e.g., Medicare) would determine what the costs of all services would be for a given clinical problem under the current system (fee-for-service plus DRGs). All services would be bundled under a single fee that would be discounted by about five percent. That discount represents current preventable costs such as “excessive” days of hospitalization, “unnecessary” imaging studies, “preventable” complications such as wound infections, and “unnecessary” re-hospitalizations for “inadequate” post-discharge followup. If the medical team of professionals and institutions failed to prevent these or other “additional” costs, the team would bear the loss.

Well fine. But how many of these costs are truly preventable? At the time that services are rendered, almost all decisions are clinically appropriate. It is only in retrospect that an occasional decision might have been changed, but most would not have been. Then there is the fallibility of the human mind. Just as no person could be expected to have a perfect score on every exam taken throughout life, no health care professional can be expected to have a perfect score on all clinical decisions, especially when the perfect response is often still an unknown.

Another problem is that bundling requires organizing individuals and institutions together based on a single clinical entity. The composition of the team would vary depending on the nature of the clinical problem. The team would accept the one bundled payment but then internal disputes over the distribution of the funds certainly would be inevitable. Although the payer is relieved of the administrative services of allocating these funds, the process does not bode well for creating a harmonious, collaborative environment for high quality patient care. Those who believe that these arrangements could evolve into “accountable care organizations” are delusional.

In spite of RAND’s optimism, “bundling payments” will not reduce costs. It will only reduce prices, while actually increasing costs by introducing yet greater administrative complexity.

Purists in written composition might contend that I’ve overused “quotation marks” in my comments. My defense is that health care reform should not be based on “quotation marks” and a “wink.” It should be based on sound health policy science (no quotation marks).