Why Bundled Payments Aren’t Working

The New England Journal of Medicine recently ran an article by Clay Ackerly, MD, and David Grabowski, PhD, calling for “Post-Acute Care Reform.”

They use a (presumably) fictional patient to illustrate the problems with the current payment system:

Mrs. T. is an 88-year-old woman who lives alone, has a history of congestive heart failure and osteoarthritis, and has traditional fee-for-service Medicare coverage. One day, she was found lethargic and sent to the emergency department, where she was discovered to be in renal failure and was admitted to the hospital for fluids and monitoring. Her hospitalist concluded that she had accidentally overdosed on Lasix (furosemide). On hospital day 2, Mrs. T. was having difficulty ambulating, although her cognition and renal function had improved and she felt “back to her old self” and was eager to go home.

What to do?

The hospitalist had two primary options. He could keep Mrs. T. in the hospital another night, although she was medically stable and had no further diagnostic or medical needs. That would cost the hospital money under Medicare’s system of fixed payments for diagnosis-related groups, but it would give Mrs. T. more time to recover her strength and extend her stay to the 3 days required to qualify her for a stay in a Medicare skilled nursing facility (SNF) if needed. The hospitalist believed this option was wasteful and potentially harmful, in that it placed Mrs. T. at further risk for hospital-acquired conditions. Equally important, it went against her wishes — particularly if the end result was a SNF stay.

Alternatively, the hospitalist could send Mrs. T. home, holding the Lasix to prevent a repetition of the cause of this admission and arranging for a follow-up evaluation by a visiting nurse. Home health agencies are expected to provide an admission visit within 48 hours after discharge, and they receive a fixed payment from Medicare for a 60-day episode of care — a policy that may neither match the needs of a patient requiring prompt, intensive short-term skilled care nor provide agencies with appropriate reimbursement for that intensive care. This option presented a higher risk of falls and further medication errors, but it served the hospital’s interest in limiting lengths of stay and Mrs. T.’s desire to return home.

But neither is very satisfactory. They are not tailored to her particular needs and would likely result in a re-admission to the hospital, according to the article. You see, “Patients’ discharge plans are often made for financial rather than clinical reasons, which contributes to the inefficient use of post-acute care and the high rate of readmissions.”

The authors recommend a bundled payment system in which, “hospitals and post-acute care providers are paid for a fixed “bundle” of services around a hospital episode, including post-hospitalization care.” But, alas, there are “substantial regulatory and operational barriers” that prevent such a system from being instituted.

But before we think about the barriers, perhaps we should take a moment to consider what has been said so far.

We have three conditions that profoundly affect this patient’s treatment –

  1. The decisions are being made by a “hospitalist.” This is a doctor who has never seen the patient before entering the hospital and knows nothing about her other than the medical data in her file. We are told she lives alone, but that tells us very little about what she will face when she is discharged. Does she have friends or family members living near by? Are there people who love her and will drop everything to provide care? Does she live in a third-floor walk-up apartment, or a single level home with easy mobility? Does she belong to a church whose members will gladly bring her meals and help her with medications? Is she poor or does she have means with which to hire caregivers? All of these considerations would make a difference in her ability to manage her condition at home, but the hospitalist doesn’t have a clue about any of it.
  2. We have a Medicare system that provides a fixed DRG payment for her condition. This is already a “bundled payment” but one that encourages discharge before the patient is ready.
  3. We also have a Medicare system that expects home health agencies to “provide an admission visit within 48 hours after discharge, and they receive a fixed payment from Medicare for a 60-day episode of care.” This, too, is already “bundled” into 60-day packages. Plus, what is Mrs. T supposed to do in the 48 hours while she is waiting for a visit?

The authors are correct that this is a messed up system that is unlikely to provide the patient with the care she needs. But it is messed up because of previous attempts to “fix” the system. We have already bundled payments into packages of care and introduced a whole new breed of “caregiver” to coordinate things ― the Hospitalist.

The result has been a clumsy, arbitrary payment system that is blind to the real needs of real life patients.

Before we move on to even greater swell ideas to fix things, perhaps we should consider why the previous swell ideas have failed so miserably.

Comments (42)

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  1. Ken says:

    Good job, Greg.

  2. Roger Waters says:

    Greg, Greg, Greg,
    The definition of federal legislation is “a bunch of swell ideas to fix [every]things.” When my work was health LA in US Senate we thought we had things figured out. Only when leaving the government, and working for a client trying to implement regulations, did it become apparent to me how our one size solution did not fit all. Don’t get me wrong, the policy-wonks are a bunch of do-gooders and have all the right intentions, but they have no idea how things really work, they are not physicians or hospital administrators (at least the senior ones that worked with me, e.g. CJ and JL), and they are so ensconced in the politics they think a valid concern or critique is from the other political party and they vehemently defend themselves even in light of reality (witness Healthcare.gov). Nuff said, back to work in the real world. Thank you for your article.

  3. Kevin F says:

    It is hard to tailor the system to the particular needs of every individual. It would be expensive, impossible to handle and not very effective. If we want universal healthcare with coverage for everyone, we must have a system that can easily suit the needs of different people. The bigger the box more things will fit, regardless of shape or size. Universal healthcare will only exist if we stop differentiating patient by their financial capability, life style or health conditions.

    • Hostanliv says:

      I do agree with this comment.

    • Roger Waters says:

      “…we must have a [single] system that can easily suit the needs of different people…” – Karl Marx

      Sorry, you really need to work in a hospital to realize how ridiculous this statement really is. And, by the way, the only way to truly treat patients is by knowing their phenotypes and genotypes, which, by definition, is differentiating patients. Please attend medical school for more.

      • Kevin F. says:

        I haven’t attended medical school that is correct. But, that doesn’t mean that I don’t understand what makes a person different from another, probably not technically but I understand the essence. I also understand that because everyone is different everyone have different needs. But what I am saying is that if we want a healthcare system provided by the government, it shouldn’t have distinctions. That is what Marx is saying, that a government is not capable of providing to every need of every individual. If the people want a government directed health system, they should expect a system that doesn’t differentiate its patients. I don’t know what is taught in med school, but I know that the government cannot tailor its laws to every individual. That is what I meant with a big box that suits all, a broad system that covers whichever need you might have and that doesn’t discriminates on wealth, race or condition.

        • Greg Scandlen says:

          I was wondering where you were going with these comments. But then you wrote — “If the people want a government directed health system, they should expect a system that doesn’t differentiate its patients.” So I take it you would agree with me that a “government directed health system” is a really bad idea.

          • Kevin F. says:

            That is correct; I believe that government intervention in healthcare it is a really bad idea. Let doctors and patients come up with a treatment that suit their needs. That is the only way in which the health care can be patient friendly. Without government the system that can be tailored to the specific needs of the individual. But if we want a program ran by the government we need to follow Marx’s idea of a broad system that suits everyone; a system that provides the same coverage without discriminating.

    • wanda j. Jones says:

      Do you see the internal contradictions in your response? You want Universal Health Insurance, but admit it is hard to make it suit everyone, if we still differentiate people by “financial capability, life style or health conditions.” Doesn’t that lead to the obvious: everyone gets the same amount and type of care? Isn’t it obvious that centrally-planned healthcare will not work at all?

      An alternative is a “course of illness” form of payment that allows the attending physician and his team to check off the services needed by this particular patient, indicate who is to provide them, then have a budget allocated to the responsible clinical program which can then supervise the care of the specific patient. Payment methods, such as the lump sum for home health care can be demolished by simple sorting of prior cases by acuity. Uses of averages to produce a simple payment method are doomed, but used because of the ignorance and laziness of policy techs.
      Why will we not leasrn this lesson for good adn stop thinking that the fall-back from present problems is “universal health insurance.” That just wraps all our present bad habits into one plan with a big bow around ite for PR purposes, while it continues to miss the mark for most people.

      Wanda Jones
      San Francisco

  4. Veronica R says:

    Mrs. T financial means should not determine the type of care she receives. People should receive the same treatment if they have the same insurance coverage, regardless of their net worth. Especially if that insurance is provided by the government.

    • Roger Waters says:

      Agree, but if, and only iff, patients are identical should they receive the same treatment. Otherwise, you are falling into the slippery slope of “one size fits all” and cookbook medicine. Which, next time you need medical care, you might not want?

    • Steven Horvitz, D.O. says:

      This case just proves the point that the govt is not able to provide proper let alone equal care. Care comes from the caregivers, the physicians, nurses and other health professionals, not from govt or insurance.

      If the govt and insurance companies went away tomorrow, we would still have health professionals to provide care, just in a different system. Our politicians in collusion with insurers and other healthcare conglomerates have produced the mess we call our US Healthcare System. I see no reason why we shlould let them continue to screw it up.

      Patients and Doctors and Health Professionals should get together and hash out a system that works. No Special Interets allowed!

    • Greg Scandlen says:

      So, I take it that you oppose Obamacare with its $6,000+ deductibles? Such a deductible would prevent people of different net worth from getting equal care.

      • Veronica R says:

        I disagree with the plan that was intended to make healthcare affordable but didn’t. I disagree with a program that was improvised. I disagree with the program whose goal was political rather than the wellbeing of the people. I disagree with a program that threatens the financial stability of the nation. I disagree with a program that lies to the American people in order to be accepted. I disagree with Obamacare, because it is not the solution we need.

  5. Miguel V says:

    The main issue is when we start making medical decisions based on financial considerations rather than by medical judgment. The current system places money as main driver in the medicinal industry. I have always question the ethics of doctors who place money in front of their patients. It seems that the Hippocratic Oath has lost its true meaning. If we want to fix the system, we should start by rethinking our priorities.

  6. Harplin says:

    Good post

  7. Paul C says:

    The bundled payments are not working, but it is just a piece of the whole system that is not working. The reform has led to the failure of several key portions of the system. We require prompt action before a crisis develops.

  8. Fred J says:

    I don’t think we should question the decision made by the ‘hospitalist’. The job description is that, making decisions for patients who are facing emergencies. If we don’t trust them in making the right call, why should we trust them with their procedures? They might not be the patient’s doctor, but that person went to med school as well. I believe that their judgment is adequate for these situations as the ‘hospitalist’ is impartial and will give an objective opinion. The call will be made solely on the medical conditions, not things that surround the patient and may distort the judgment.

    • Greg Scandlen says:

      Why should a “hospitalist” be exempt from being questioned?

      You write, “The call will be made solely on the medical conditions, not things that surround the patient and may distort the judgment.”

      Do you really think discharging a patient should be blind to the conditions she will face once she leaves the hospital? Do you consider that good patient care?

    • Dan says:

      Quote from medicinenet: “The main disadvantage of having a hospitalist take care of you in the hospital is that, they may not know your detailed medical history as well as your primary doctor. Another problem is that your primary care doctor may not have access to the details of your hospitalization care (tests, procedures, results, medications, medical plan of action, etc.). ”

      WHY is the pcp not involved?? Sure, there may be advantages to the hospitalist, but why are they shutting out the pcp? That’s nuts. Both should be involved.

      • Gary Alan Mohr MD says:

        I am a board certified family physician. I used to go to the hospital day and night to make rounds, admit patients and deliver babies. The work load became staggering and the reimbursement negligible. I told one attorney what I got paid and he said, “We call that pro bono work.”
        So now I sit in my office all day and see patients, very efficiently, and I usually call the hospitalist if I have someone who needs to be admitted. But the patient who goes to the ER at midnight and gets admitted does not have that advantage.
        So when the government and insurance companies started cutting my reimbursement, they jeopardized patient care; and now they want to “fix” it.
        The government has a long history of creating crises and using the disastrous outcomes of their “fixes” as an excuse for more intervention and more government. Don’t trust anyone who says “I am from the government and I am here to help you.” They really want to control you.

        • Roger Waters says:

          Agreed, from a fellow, real world practitioner. Too bad it is getting so hard to practice medicine.

          And not only do they create crises to then “fix” them as a way to exert further control, but they also use our money to do it!?! They should get a real job, in the real world, to find out what it is like to deliver and finance health care services and be a productive member of society. Rather than feeding off the public trough, then making the trough bigger to expand their fiefdom?

          • James R Chaillet, Jr. ,MD says:

            As a fellow family physician I also agree. I would add that, after 35+ years as a physician, I don’t see a ready solution in thinking in terms of systems. People are individuals and their situations are unique. I have,however, come to the conclusion that people could benefit from having a real trusted and caring primary care physician – one whom they are willing to pay in some form for professional service.

            I may be dreaming but I believe that most would be better off if they and not insurance companies paid directly for the services. For those, who cannot afford to pay, charity care in the true sense of the word would be better than what we have now.

            Patients might appreciate the care. Physicians would do better financially (billing third parties is half or more of overhead) and they would feel better about their work. Taxes could and should be lower.

            Of course a lot of parasitic bureaucrats and insurance employees would have to fine other gainful and, hopefully, more rewarding work

            Thank you all for the article and the thoughtful responses

  9. Blake P says:

    If one size fit all solution does not work, what should we do to reform the health care industry? It is not a mystery that the American health system is failing; the reform hasn’t work and seems as if it won’t work at all. What can we do then? Leave everyone alone and ignore those who can’t afford health care?

    • Steven Horvitz, D.O. says:

      First take the third party out of the exam room and let doctors and healthcare professionals do their job. If insurers and govt want to be involved, they can be involved after the appropriate care is given. They should not be dictating based on price/costs what care is allowed.

      Free up healthcare professionals to offer more and charge less. This is the way to lower costs. If free market costs dropped hc spending by say 33%, what would happen to the state and federal budgets for hc?

      • Bill says:

        Someone has to manage the financial risk. Are Providers willing to do that?
        If so you can eliminate the need for Insurance Companies.

  10. Ralph @ MediBid says:

    fixed costs are fixed costs, and if it relies on 3rd party payers, it is not the solution

  11. Devon Herrick says:

    Bundled payments are a way for firms to compete for customers in an efficient manner. For instance, restaurants bundle the entre’e with the side dishes. By contrast, fast food chains sell individual items separately.

    It isn’t the bundled payment that makes it competitive; it’s the competition that makes bundled payments work. Notice that restaurants that feature bundled payments, still tend to separate the drink, the appetizer and the desert. This is a way to appeal to patrons with differing demand for price points. On the other hand, the combo meals at the drive-through bundle the drink, a side and the entre’e in the hopes you will see a discount and accept the package.

  12. Ian Duncan says:

    I think this discussion has devolved to debating hospitalists (I don’t have strong opinions of them; there is probably a normal distribution of good and bad quality). Regarding Bundled payments, of which I have some experience (being on a CMMI panel and doing actuarial work for them) there seems to be a significant lack of understanding of the implications on the part of hospitals. The major issue is the need for complete re-organization of hospital processes and integration with these other services. Some hospitals may be organized to do so, but judging by the CMMI proposals I read, most had no idea how to integrate services and manage the risk.
    All that said, what this unfortunate lady needs is probably more resources, not fewer, and the last time we tried to shift financial responsibility to providers (HMOs, anyone?) people complained about the fewer resources that these entailed.

  13. wanda j. Jones says:

    RE: Hospitalists: There is a third model; mature medical groups are assigning their own hospitalists to see the patients of the group, where they also know and communicate with both the PCP and the specialists the patient has already seen. THis person is in a good position to oversee discharges and post-acute care. If a hospital is admitting patients with more than 60 different health plans, and have 3 – 10 medical groups plus individual doctors on the medical staff, there is no way it can have either a single standard of care or a single set of prices for an episode of illness. In my view, that’s good, as the alternative is, as we have seen, ,an inchoate drive to have both of those goals met via payment method rules. Can we not start from the premise that patients do differ, so that their mix of services should differ, and the corresponding costs will differ? What can achieve that the best? It isn’t a negotiated bundled payment.

    Let mem add a complication: Suppose your patient has “co-morbidities” in that she is also diabetic, has arthritis, and is grossly over-weight. Have fun with that. [I have a paper on “Protocol-based Reimbursement.”]

    This topic, Greg, is so important, that it should be revisited regularly.

    Wanda Jones
    San Francisco

  14. Ralph @ MediBid says:

    Remember what Einstein said about the definition of insanity?
    The problem is very simple, and the solution just as simple
    30 years ago the product changed from “medical treatment”, to “healthcare”. Medical treatment is a service which can not be leveraged, healthcare is a financial instrument which CAN be leveraged.
    Goldman Sachs knows this
    Bernie Madoff knows this
    Lehman Bros knows this
    Sub-prime mortgage lenders know this
    Blue Cross knows this
    Leveraged assets can create a bubble and drive up costs, services generally do not.
    Thats why we have changed the product back to medical treatment. It works, yet only business can hear it, not politicians

  15. Marshall Ackerman says:

    The article fails to mention the patient’s family physician. Someone is prescribing Lasix. The hospital is not in contact with the primary care physician and the author of this article has also left it out of her follow-up. Under the best of circumstances the hospitals would contact her primary care physician to provide appropriate follow-up

  16. Robert Popovian says:

    I agree with Greg Scandlen’s assessment. DRGs, episodes of care and bundled payment policies which isolate the patient and or the delivery component/segments are more harmful than good. We need a Global payment policy for providers in US which encompasses are services including pharmaceuticals to ensure incentives are aligned to provide the most efficient and value added care for the patient; thus ensuring effective care for patients which reduces overall health care expenditures while improving patient quality life, care and utility.

  17. Doctorsh says:

    Global payment policy???

    No third party can come up with a system that will work better than a free market. Insurance is necessary but needs to be behind the scenes and fully transparent in what they will pay. But payments must first come from the patient and the insurer can reimburse the patient.

    • Bill says:

      Are you suggesting Providers want to be in the collection business? This how it was in the old Indemnity business 50 years ago and Providers demanded assignment of benefits from Insurance companies.

  18. Doctorsh says:


    No, I am suggesting that physicians get paid directly from patients. Providers can do what they want.

    • Ralph @ MediBid says:

      I agree that PT’s should pay MDs direct. This changes the “product” to medical services, and corrects the problem

    • Bill says:

      My definition of Provider includes Physician, Hospital, etc. Anyone who “provides” services. I doubt any Provider wants to be in the individual collection business. This would be very difficult with all the various contractual fee arrangements a provider has.

  19. DoctorSH says:

    I can’t answer for providers as I am not one, but as a physician, most I speak to would prefer to get paid directly from the patients who seek their services.

    Physicians don’t consider money paid for their services as collections, but as the simple word payment.

  20. charlie bond says:

    Hi Greg,
    You have hit upon a subject very near and dear to my health policy heart. For the last 4 years, we have been designing and carefully implementing a type of delivery system known as a Continuum-of-Care Organization or COCO.
    This was recently described in Grand Rounds presented to the UCSF/Hastings Consortium.
    A COCO brings together the entire team of providers and patients in single unit. All communicate and are guided by a single patient-centric case manager for in-patient, out-patient and home care. In our COCO, the case management is provided by specially trained RN’s and a medical director who happen to be affiliated with the home health agency in the COCO.
    The providers in the COCO continue to operate on fee-for-service payment schedules, but they are additionally incentivized to meet quality medical management metrics, and are paid an upside-only gainsharing bonus on all savings. Note all providers participate in the gainshare, AND so does the patient.
    The studies are increasingly clear that home is the healthiest place to recover. Indeed, studies show that for many procedures post-surgical direct discharge to an in-home hospital bed is less expensive and yields better medical outcomes with fewer complications than keeping the patient in the hospital.
    You are absolutely correct in observing that discharge in most medical institutions is a financially determined date, when it should be a medically dictated decision.
    The silos of outpatient care, ER care, hospitalists’ care, SNFists’ care, nursing home care and home health have to be broken down using streamlined communications and case management tools. When a patient passes from one portal to another, the continuity of care should not be lost. EMR’s are not hacking it. All we need are communication tools and interactive case management “apps.” The great news is that this technology is out there and is getting better every day. Providers and patients simply need to avail themselves of it. Gainsharing contracts incentivize adoption of these innovations.
    Gainsharing is NOT bundled payments as that term has been historically used. It is a retrospectively paid bonus based on a percentage of reduced expenditures. Gainsharing contracts that include all the continuum of care providers and the patients represent the most promising way to align the incentives and provide a free market method of reducing health care costs while assuring that everyone who helps cut those costs gets a share of the savings.
    Anyone interested in learning further about COCO’s should feel free to contact me directly at cb@physiciansadvocates.com
    Charlie Bond

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