Myth Busters #19: Are Bundled Payments the Answer?

One of the more peculiar mental twists by the health academics is the notion that the answer to the problems with fee-for-service is to bundle some of these services into single packages.

As we argued in our last posting, FFS is not a problem in health care or anywhere else. The problem is third-party payment. But for the moment let’s suspend our disbelief and accept that FFS is a problem. In what way does bundling solve it? Or even address it?

The proponents of bundling would go from paying a fee for a single service to paying a fee for a bundle of services. It is still fee-for-service. In fact services are already bundled. An office visit to a doctor “bundles” many discrete services such as weighing the patient, getting a blood pressure reading, checking pulse and lungs, interviewing the patient about how she is feeling and whether she is having any reactions to the drugs that were prescribed during the last visit. These services are not billed separately but are “bundled” into an “office visit” package.

Presumably, the advocates of bundling would want more and bigger bundles, or they think they know what should be in the bundle better than the physician does. Or perhaps they have no idea what they are talking about. It is simply the latest term they use to pretend they have something to say.If third-party payment encourages doctors to perform more services, would it not also encourage doctors to perform more bundles of services? Is there really any difference? Are there any examples in the real world of how bundling might actually work?

Well, yes, as the matter of fact. There is one very big sector of the economy that is all about bundling. That is higher education. When young people go off to school, they do not pay separate fees for different professors or different courses. They pay a single annual tuition that covers an entire year’s instruction. The tuition is also “community rated.” Other than a distinction between in-state and out-of-state, all students are charged the same rate. The smart ones pay the same as the dumb ones even though the two groups will require different levels of service. Everybody pays the same for a comprehensive bundle of services.

This is just perfect. It is everything an academic could hope for in health care. Surely higher education is a great example of these progressive principles in practice and a beacon for what we could do in health care

Well, maybe with one teensy exception. It doesn’t slow spending a whit. Quite the opposite. Doug Short expands on the CPI chart below to include “College Tuition & Fees” as a separate item.

It turns out that college costs have risen twice as fast as even health care since 2000! It is unrelenting. Year after year, during good times and bad, it rises twice as fast as health care.

Is bundling a bad idea? Of course not. Physicians have been bundling for all eternity. They do it when it makes sense and enhances value. But today they are not allowed to create new bundles because the federal government doesn’t pay that way. It pays according to discrete ICD codes that are getting increasingly (and absurdly) specific.

But neither is bundling a panacea, especially if it is dictated by the same people that brought us the ICD-10 codebook.

Comments (18)

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  1. Devon Herrick says:

    As Greg mentioned, bundling isn’t the solution, it’s a symptom (i.e. the logical outcome) of a system defined by consumer sovereignty. In other areas of the economy, suppliers bundle services for both their convenience, and the convenience of their customers. McDonalds lets you buy individual items; but also offers a combo meal. TGI Friday’s mostly bundles dinners together, but prices drinks and desserts separately.

    The food bundles we enjoy today would not necessarily be constructed in the same way in the presence of a third-party payer. Neither could a third-party payer have dictated the bundles and have them evolve the way the market currently is.

  2. Larry says:

    Bundling is not THE solution. There isn’t A solution.
    Let’s explore your example of higher education for a moment. You can compare the cost of an education at Dartmouth v Penn State University. You can also study the outcomes based on success of the graduates. But let’s not go there and leave the quality discussion for another day.

    Back to bundling … let’s take automobiles. Imagine if the car came totally disassembled and you had to buy each part and pay the mechanic to assemble it, test it, etc.? You buy cars as a bundle.

    The problem that bundling solves (and it doesn’t solve all the problems and bundling is not the answer to every aspect of understanding cost) is that when you go to a hospital for a procedure you will get an approximation of what it costs. You will also be able to compare one institution with another or even an alternate outpatient procedure. (You should, in my view, also get a medical warranty – if they make a mistake they fix it, at no additional cost.)

    Due to deductible plans, particularly high deductible plans, many physicians are reporting difficulty collecting from their patients.

    I believe this is a result of at least two factors:
    1) Patients don’t know how much the hospital visit including the surgeon, anesthesiologist, radiology and so on will cost. When they get the bill they are in shock and disbelief. They don’t feel obligated to pay because it is in their view realistic relative to their expectations.
    2) They haven’t had an opportunity to save, borrow or make other arrangements to pay the bill.

    So bundling can serve a useful purpose, as long as we don’t get carried away and believe it is THE answer.

  3. Brian says:

    interesting, Larry, on the idea of a medical warranty.

  4. Ken says:

    Good post.

  5. Greg Scandlen says:


    I agree it is useful for some procedures in some situations, but even then I fail to see how it will curb cost increases.

  6. John R. Graham says:

    Greg, Devon, et al: You’ve done it again!

    Do not let the university administrators or state budget officers read this post. They will conclude that the solution to the post-secondary education cost crisis is to un-bundle payments!

    That’s right: Students should not pay “tuition.” Rather, they should pay a rent for the lecture halls, pay professors and lecturers individually for each course (“fee for service”), and pay overhead for the universities’ administrative staff.

    These bills should all come separately and with no indication how they connect to each other. That way, the students would be forced to determine the value of each service and costs would go down.

    But seriously, there is no way, a priori, to know what is best bundled and what is best un-bundled. Only through trial and error can businesses figure this out. When travelling by air, I would never tolerate a system where I paid separate fees for the pilot, the co-pilot, the cabin crew, the fuel, the depreciation, the overhead, the airport landing fee, etc.

    And yet, I no longer get a free meal or alcoholic beverage in economy class: They have been un-bundled, although they remain bundled in business and first class.

    There is no right or wrong. There is only what works when the customer pays directly.

  7. Bob Geist says:

    Greg, it would be nice if a person paying cash (with an HSA) would be able to view the average cost of let’s say a cholecystectomy including preop, hospital, surgeon, and post op care. I understand that such programs to estimate such a bundle are available based on average community encounter charges. Seems to me that a bundle could even be specific for an insurance carrier netwlork if there is any cooperation possible with such carriers. Fine analysis of bundling–thanks, Bob

  8. Peter McMenamin says:

    It has long occurred to me that “bundling”advocates just want someone else to make the hard decisions. They don’t want to engage in hard negotiations on price and they are clueless on controlling utilization. They want to posit a bundled price and hope that providers will play and then fight among themselves to determine how to split the bundle among the various participants. Problem solved.

    Having studied the concept of “physician DRGs” back in the late 1980s I know that one can compute an “average price” for a bundle of services, but the variability about that average was not small, and it often involved major differences in the specific services included in the bundle (more so than different payment amounts for the same set of services). Problem solved indeed.

  9. Virginia says:

    I agree with Peter. Bundling is an effort to avoid Medicare having to negotiate all of its prices.

  10. H D Carroll says:

    I think we can distinguish between bundling for payment and bundling for estimation. Mechanics may offer an estimate of the services (and therefore the price) for a given auto repair, but they are rarely held to it if the number of units they estimated turns out to be different, or they discover a ruined gasket, etc. Some might provide true bundled pricing, but then Peter’s point comes into play – the variability around the “expected.” Hospitals should be required to report their “unit usage matrix” of actual individual services that feed into each DRG episode, along with the “billed charge master” vector for each unit. They have this information, and it should be required they make it public. Then, the average number of units per episode can be calculated, and an average bundled price determined. Of course they will have a huge variation in the units used across a given DRG, but the key here is that it is not the “price” per unit that is varying, it should be the number of units. What are we missing? The price list, as well as a list that tells us what, on average and for the median values, what they actually received for every DRG episode. Bundling for either guaranteed price or for estimation still requires the price variable be a known quantity, and until we have transparency (and ultimately rationality) of the underlying bill and net received lists, we will have gained very little in terms of consumer useful information. (Note that a bundled guarantee would by nature have to include some large addition to the average for the variability, which means that a lot of cases will subsidize the outliers, etc., the same with any one size fits all product.)

  11. H D Carroll says:

    By the way, just saw this story about the unbundling of college tuition fees – , which is kind of interesting given the discussion of bundling in higher education above. And look at the reaction. Cheers.

  12. Greg Scandlen says:

    John Graham,

    When I was in college I often thought I would have preferred to pay on a per-course basis. Some of my classes were a total waste of my time (and money). I might have paid $10 just to have a place to take a nap. Others were invaluable and I would have paid a whole lot for the privilege of being in the class. So I don’t think your idea is unserious at all.

    HD Carroll,

    Yes. I was thinking of hip transplants as example. A bundled payment would presumably include a certain number of hospital days and a certain number of physical therapy visits. But some people will require a whole lot more of each than other people. A marathon runner will likely recover much faster and need fewer services than a 400 pound diabetic. If the bundled fee is an average of the two, the runner might prefer to go someplace where they charge just for the services consumed.

    The problem with ALL these schemes is they always average the experience of a diverse population. Health care must be personalized and customized to the needs of each individual.

  13. Linda Gorman says:

    The problem is that bureaucrats and ivory tower academics will be determining the bundles.

    In all cash systems payments are bundled–take a look at the UK BUPA hospital website. They look you over and give you a quote that includes hip replacement, hospital stay and rehab.

    The cost of the private hospital bundle depends on their expectation of how things will go with your specific case. If they’re wrong and you cost more, they take the risk.

    When bureaucrats (either public or HMO private) do bundles, prices may end up being generally inflexible and set so low that the sickest end up getting significantly lower quality care.

  14. John R. Graham says:

    @Greg Scandlen:

    You were ahead of the curve. See

    It will be interesting to see which classes end up charging higher rates. Will it be the easy, basket-weaving ones? Or the ones that lead to higher-income employment?

  15. John Torinus says:

    Greg, I look at bundled payments as an essential part of transparency on pricing. No one, not my CFO, can understand a health bill and its many line items as currently presented.

    If a knee replacement costs $27,500 all-in (with discounts), I have a fix on the price. If it goes to $28,000 next year, I have a fix on the inflation rate at that provider, up about 2%.

    Bundled prices are not the single answer to harnessing the hyper-inflation, but they are another good tool.

    NB: That rate is what we are paying at my company. With a little push, our TPA has accomodated that change in pricing methodology.

    Our MRIs are $600 and have stayed at that price for three years. Why not bundled prices?

  16. Karl Stecher says:

    Linda Gorman’s post is correct, but let me extend it further. In the private practice world, as a surgeon, to whom would my bundled payment for surgery be made? To the hospital administrators? Totally untrustworthy. You think I would trust The Medical Center of Aurora (Colo), where the ICU nurse overdosed my postop patient with morphine so he could not breathe, then took him off the respirator to his eventual brain damage and death, and forged a second set of nurses’ notes so that I did not understand what happened? And the hospital covered it up (and blamed me) until a malpractice lawyer sued the hospital (but not me) successfully when he found both the original (which I had not seen) and second set of notes? Or Swedish Medical Center (Englewood Colo), where “their” employed doctors transferred (illegal by COBRA/EMTALA)a 22 month old patient with three thoracic spine fractures to a facility more convenient for the pediatric trauma surgeon, then inadvisedly operated and paralyzed her from the waist down forever…and would not renew my Trauma contract for the next year because I complained.
    Have those administrators in charge of distributing a bundled payment, and paying me fairly as the surgeon? Don’t think so.

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