If Mandatory Bundled Payments Save Little, What Will?

It is well known that the cost for specific procedures in US hospitals is not only far higher than in most Western countries, but it may be far greater from hospital to hospital in the same geographic area. And this may not include an apples-to-apples comparison of all of the components of care. As a result, it is well accepted that the cost of US health care is too high, outcomes are generally no better than in other Western countries, and the search for better value continues.

A unique, jumbled health care financing scheme has ruled the nation for many years. Hospitals and clinicians are paid in various ways in this country: reimbursed for most every service provided, prepaid in a form of capitation (fixed rates no matter how much service they provided), fixed rates for specifically defined “episodes of care,” and per-diem rates for hospitalization (a fixed rate for each hospital day, which includes most routine care and testing).


Except for fee-for-service (FFS), these payment mechanisms attempt to place some risk on physicians, hospitals, and most onerously on patients. In the 1960s through the 1980s, FFS was dominant. Providers were deeply satisfied with their remuneration and their autonomy (until the rise of managed care in the late 1980s and early 1990s). Steep cost increases have been well publicized overall. Disease treatment has improved of course with the introduction of new technologies, but our ability to manage the costs of their increasing utilization in practice is a tremendous challenge (consider biologic drugs, genetic therapy, robotic surgical procedures, new diagnostics). Today, hospitals and payers play a perverse FFS game of enormous charges vs. low reimbursements, with the patient often caught in the middle.


Capitation placed the most risk on providers, and this was used most commonly in primary care practices. Doctors contracted with health plans to receive a fixed, per-member payment. Regulators feared that the physicians might underutilize resources while treating their patients, in order to optimize their capitated income. That is, clinicians might not send patients to higher cost specialists, elect to not give them the most effective (but higher cost) treatment, or not refer the patient for necessary testing. One challenge with contracting for the “right” capitation rate was to factor in an appropriate add-on payment to cover the cost of those with expensive-to-treat illnesses (i.e., risk adjustment). That is one reason why capitation rarely included drug costs.

However, capitation did remove the incentive to overtreat patients, by exposing them to excessive testing. It is efficient, maybe too efficient: It helped establish the concept of assembly line medicine. Practices had to reduce patient visit times to squeeze more patients onto their appointment schedule—a necessity if they were to optimize revenues. Inevitably, it leads to burn out and dissatisfaction with their practice. Capitation still exists today, but outside of more extensive utilization across the country or a more sophisticated form (e.g., the patient-centered medical home), it seems potential value may be limited.


Prospectively arranged per-diem rates are commonly used by Medicare and private insurers, but the per-diem might not account for some carved-out services. Hospitals may be incentivized to provide more of these specific services than necessary, bloating their charges. To counter this incentive, per-diems may be charged for different types of patients (e.g., cardiac, obstetrics, intensive care).

However, this form of inclusive payment made it easy for health plans and insurers to deny hospital claims for additional days of care. This led to hospitals claiming that patients were discharged earlier than warranted medically. Inevitably, hospitals would seek ways to justify longer hospital stays (and thus additional per-diem payments). Somewhat surprisingly, this resulted in more layers of administrative complexity and costs (to determine the appropriateness of stays), and less surprisingly, how to collect denied charges from payers.


From a health plan or purchaser’s standpoint, arranging fixed rates for a full episode of care was thought to be the most efficient way to pay for care. It would remove the incentive for excessive charges, and compel providers to be as efficient as they can with their own resources. In other words, it aligned all incentives on both the payer and provider sides.

Medicare or a private payer would prospectively contract for a set amount for knee replacement surgery and care. This would encompass all charges, including the orthopedic surgeon, surgical facility, joint replacement device, medications, anesthesia, nursing care, and even rehabilitation care (i.e., a global payment). On the other hand, these payments could be  “bundled” to incorporate just surgical and operating facility expenses or other groups of related services. The terms global or bundled payments are often used interchangeably.

Medicare pioneered this movement, with the initial introduction of a type of global payment called diagnosis-related groups (DRGs) in the 1980s. These single payments were based on the average costs to treat a similar type of patient, regardless of additional services rendered. This approach was considered an appropriate way to reduce or at least minimize costs, because the incentive would allow providers to care for patients more efficiently.

bundled paymentsCONFUSING RESULTS

The Centers for Medicare and Medicaid Services (CMS) instituted a program in 2016 that forced the use of a bundled-payment model for hip or knee replacement in 75 random metropolitan areas. In this program, hospitals received bonuses or paid penalties based on their Medicare spending over the time of hospitalization plus 90 days postdischarge. This is referred to as holding upside and downside risk. This program was dubbed Comprehensive Care for Joint Replacement. Medicare hoped it would save a bundle using bundled payments compared with standard reimbursements in other geographic areas.

And save it did, but on a very small scale. A study published in the New England Journal of Medicine revealed only modest savings for Medicare. Researchers reviewed costs for over 650,000 knee and hip replacements in both the areas designated to receive bundled payments and those not receiving bundled payments. The average savings amounted to $812 per patient for the bundled payment providers, or a 3.1% decrease compared with the control group. The researchers believe that the greatest factor in the decrease was that few patients in the bundled payment group were discharged to post–acute care centers. When hospitals that earned bonuses were paid out, the savings were smaller still. In other words, the savings did not accrue from the most expensive portion of the care—that provided in the hospital.

The researchers did find compelling evidence that there were seemingly no differences in health outcomes between the two payment groups. But then again, it seems that the care provided in the hospital may not have really been different.

Participation in this program was mandatory in the first 2 years, unlike other alternative reimbursement programs spurred by CMS, which are voluntary in nature. In fact, the Comprehensive Care for Joint Replacement program was changed to voluntary status at the end of the 18-month study period. Today, HHS Secretary Azar is considering converting participation from voluntary to mandatory. A recent GAO report supports this, saying that if a program is voluntary, providers that fare poorly will quickly drop out. Yet, the results from study’s mandatory participation period failed to yield anticipated savings.


The savings were disappointing if you consider that hospitals had both upside and downside risk. The only real difference in hospital behavior was the lower use of post–acute care in those receiving bundled payments. It might well be that the problem was that the bundled payments were too generous in the first place. However, by lowering this amount greatly (and thus compelling greater savings), the outcry from providers forced to participate would have been deafening.

Yet, this is one of the main problems: health care costs are unjustifiably high in the US. On the other hand, can one argue that since the savings were so modest, traditional reimbursements to providers may not be so high after all? Well that just seems wrong, based on our knowledge that US health costs are much higher than elsewhere around the globe.

It’s difficult to appraise what the total cost should be, as some studies include hospital costs only and not the total episode of care. Therefore, it may take some more experimentation to fine-tune how to extract more savings.

Consider though, if global payments cannot reduce our medical expenditures significantly, what can?