What’s Wrong with Bundled Payments?

First, the data show that Medicare typically spends as much or more in the 90 days after discharge as it spends for the initial hospitalization. For patients who are admitted for chronic illnesses such as congestive heart failure, post-acute care spending can average twice the cost of the initial hospital stay, and 90-day readmission rates can exceed 40%.

Second, the data show wide variation in average post-acute care spending…variation between the lowest-cost and highest-cost hospitals frequently exceeded 100%…

A critical finding of our analysis is that the current design of Medicare’s bundled-payment program poses financial risks for participating hospitals because the relatively small number of patients within each type of episode can lead to substantial year-to-year variation in the severity of illness in, and costs for, patients who require treatment.

Source: NEJM.

Comments (11)

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  1. Cindy says:

    So services would be preferably — for lack of a better word — a la carte?

  2. Robert says:

    I’m also reading that post-hospital care is important?

  3. Louise says:

    It’s interesting that the desire to standardize is so high — what’s an appropriate amount of post-hospital care for one patient may be woefully too much/too little for another. That’s probably another reason why a one-size-fits-all package is dangerous though.

  4. Devon Herrick says:

    Bundled payments are generally the byproduct of competition – not evidence of competition or a way to spur competition. For instance, when we buy a car, there may be optional features, but we buy an automobile assembly, where the (bundled) price includes everything in the base model. We don’t buy the tires separately — unless we ask for custom wheels. Auto dealers cannot disaggregate the parts. In health care, hospitals have little reason to bundle the price and offer, say, BlueCrossBlueShield, a bundled price if the Blues agree to… “sign on the dotted line today.” The reason is that the hospital isn’t competing on price; and the BlueCross plan isn’t the ultimate decision-maker. The patient and his/her doctor makes treatment decisions. Thus, hospitals make more money by disaggregating all services and charging BlueCross for each service as a separate line item rather than offer a package deal. Hospitals are free to offer patients a bundled price, but hospitals have little reason to compete on price when patients are not price-sensitive.

    When Medicare experiments with bundled payments, these payments aren’t serving the sale purpose as a bundled price in other consumer markets. The reason: hospitals aren’t competing for Medicare’s business on the basis of price. This is why bundled payments in Medicare aren’t some universal cure-all for improving Medicare efficiency. Competition is the solution. Bundled payments are merely a byproduct of competition.

  5. August says:

    “The success of the initiative will depend on whether it protects participating hospitals against losses resulting from both random and systematic variation in illness severity. Certain design features will make it much more attractive to hospitals, including risk adjustment, stop-loss protection for high-cost cases, an ability to exclude cases with high-cost primary diagnoses from episode definitions, and so-called risk corridors that allow hospitals to share both gains and losses as they acclimate to the program”

    Complicated, but if done properly it could work.

  6. Linda Gorman says:

    As Devon says, nothing is wrong with bundled payments if suppliers are doing the bundling in response to cost conditions and consumer demand.

    If it is top down, then it looks like just another form of regulatory (and perhaps price) control.

    As for variation, why is it so bad? There’s a huge variation in car repairs depending on the model, make, age, usage, frequency of repair, affiliation of repairer, level of customer service, and exchange rates. No one gets upset about that–yet.

  7. Dr. Steve says:

    As to the car analogy, the dealership or service garage can’t be accountable for the driving habits of the customer once they leave the lot.
    I have to defer to the economists, but my understanding is the highest correlation with readmission or “failure” rates is the education/socioeconomic level of patients.
    Any comment from those of you who might have knowledge regarding the above? I am seriously qurious.

  8. Dorothy Calabrese, M.D., says:

    “I have to defer to the economists, but my understanding is the highest correlation with readmission or “failure” rates is the education/socioeconomic level of patients.”

    “Readmitted / failure” patients typically have the most severe & highest number of co-morbidities

    significant co-morbidities lower educational & socio-economic level

    Even one co-morbidity such as schizophrenia ==directly leads to==> a lower educational & socio-economic level

    The important variables are # of and severity of co-morbidities.

    Will some hospitals deny a transplant to a Medicare patient with significant co-morbidities because Medicare bundled payment guidelines for post-op care reimbursement will inevitably be greatly exceeded?

    Dorothy Calabrese MD
    Allergy & Immunology San Clemente, CA

  9. seyyed says:

    is this why there is an emphasis now to ensure that patients get the right care the first time to prevent the need for readmission?

  10. Dorothy Calabrese MD says:

    Yes. The first-time “right care” is always the entire continuum. . . ie.
    pre-op. . . op. . .post op. . .discharge follow-up.

    The NEJM article referenced in this blog post has an accompanying audio interview with expert Robert Mechanic. He states many patients still are discharged with written prescriptions they don’t fill because they don’t have the money. In the old days, we’d dispense a month’s supply of all the patient’s medications at discharge, because back then the insurance would cover it and these very sick patients were very appreciative.

    It does seems so odd that when I was at Columbia Presbyterian, the terrific social workers were an indispensable part of this continuum. . .yet they have traditionally been excluded from Medicare reimbursement.

    Dorothy Calabrese MD
    Allergy & Immunology San Clemente, CA

  11. Natalie says:

    Dorothy Calabrese, I couldn’t agree with you more on your latest comment.
    It is so true that back in the days your doctor would provide you with some of the medication you need to buy just so you can take it for next few times before actually buying it yourself. This, in some cases, would even allow you to “try out” the medication beforehand and see if it’s actually worth buying it…or if else your doctor just needs to prescribe a different one. The convenience and affordability that this brings to the patient far outweighs any negative effects…if only they continued doing that these days.