http://www.commonwealthfund.org/publications/blog/2016/sep/bundled-payments

he Obama administration recently announced that it plans to expand bundled payment models in the Medicare program. Bundled payments are one of several new payment alternatives in Medicare and Medicaid designed to hold health providers accountable for the cost and quality of care, and thereby encourage and reward better health care value.

All these so-called value-based payment initiatives, which include accountable care organizations (ACOs) and enhancements to older managed care programs under Medicare and Medicaid, are to some degree experimental and their full effects are still uncertain. However, the spread of bundled payments deserves particular scrutiny because of potential unintended consequences.

Why Bundled Payments?

Under bundled payments, a single payment is made for all of the services associated with an episode of care, such as a hip or knee replacement or cardiac surgery. Services might include all inpatient, outpatient, and rehabilitation care associated with the procedure.

“Knee and hip replacements are well-suited to bundles because they often involve comparatively young patients who are physically active (often the source of their joint damage) and want to remain so. But when patients have multiple chronic conditions that interact with each other, it becomes less clear whether the bundle should include the costs of caring for all those problems.”

There are a number of potential advantages to this payment approach. Bundled payments give providers strong incentives to keep their costs down, including by preventing avoidable complications. Bundled payments also can encourage collaboration across diverse providers and institutions, as well as the development and implementation of care pathways that follow evidence-based guidelines. In addition, bundles target the work of specialists, who have been less likely up to now than primary care physicians to participate in value-based payment arrangements.

More conceptually, health care economists are drawn to bundled payments because a bundle of care constitutes a clinically and intuitively meaningful “product” — in this case, the clinical episode. Defining clear products in health care helps create markets in which providers directly compete on quality and price. One barrier to effective health care markets has been that prices, when available, tend to relate to inputs into clinical care — such as pills, bandages, bed days, or X-rays — that are not meaningful to consumers of care and that don’t necessarily predict the total costs of care. For example, a health system that charges a lot for X-rays may still be more efficient because it uses fewer of them or saves money on other inputs. Bundles bring all these inputs together into a single price for a single basket of services.