Medicare:

Private Sector Initiatives to Bundle Hospital and Physician Payments for an Episode of Care

GAO-11-126R: Published: Jan 31, 2011. Publicly Released: Mar 2, 2011.

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In recent years, we and other federal fiscal experts--including the Congressional Budget Office (CBO) and the Medicare Trustees--have noted the rise in Medicare spending and expressed concern that the program is unsustainable in its present form. Concerns about the rising cost of health care are particularly pressing in light of evidence that suggests that greater spending does not necessarily translate to better health outcomes or higher-quality care. Medicare's fee-for-service (FFS) payment system may contribute to spending growth because it rewards volume of services regardless of the appropriateness, cost, and quality of those services. Under FFS, a payment is made for each unit of service based on the expected costs of delivering that service. For example, Medicare makes multiple separate payments for the services associated with a complex medical procedure performed in a hospital. It pays the hospital for the initial admission and any related readmissions; each physician involved in the patient's care, such as the surgeon and the anesthesiologist; and the skilled nursing facility for any related care immediately after hospitalization. Payments made in isolation in this way may give providers little incentive to coordinate the provision of care or to control the volume of services; in fact, each admission and readmission increases revenue for hospitals, and each visit and procedure increases revenue for physicians. "Bundling," under which a single payment is made for a group of services related to an episode of care, may promote closer integration of health care providers and hold them jointly responsible for the cost and quality of services. An episode of care may refer to all services, including hospital, physician, and other services related to a health condition with a given diagnosis from a patient's first admission, including any readmissions, through the last encounter for the condition, including postacute services such as home health, skilled nursing facility, and rehabilitation. Bundled payment arrangements effectively hold providers collectively responsible financially for the health care they provide to a patient. As such, these arrangements seek to promote coordination among providers and the integration of health care delivery. To the extent that bundled payment arrangements encourage providers to become more efficient in the delivery of care, these arrangements can also benefit providers financially. Any reductions in unnecessary care that result from bundling can improve the quality of care. Some studies of bundled payments in the private sector suggest that for certain services and in certain settings, bundling may lower costs and improve efficiency. For example, one private sector pilot project conducted in the early 1990s looked at the impact of bundling hospital and physician payments for knee and shoulder arthroscopic surgery, including a 2-year warranty from the surgeon. This pilot resulted in a decrease in total costs to the payers. A more recent study of Geisinger Health System's bundled hospital and physician payments for cardiac bypass surgery procedures found that 30-day clinical outcomes improved. For example, there was a reported statistically significant 12 percent increase in patients discharged to their home. Financial outcomes were also reported to improve, including a 5 percent drop in hospital charges. Congress asked us to examine private sector initiatives to bundle payments for an episode of care. We examined (1) types of services for which private payers have bundled payments for an episode of care, (2) how private payers administer bundled payments, and (3) the views of national payers, physician specialty societies, and experts on the feasibility of more extensive use of bundled payments in Medicare.

The five largest national payers stated that they have routinely bundled payments for solid organ and bone marrow transplants for over 20 years, and a few had bundled payments for other services. The bundled payment for transplants generally included all hospital, physician, and ancillary services for the transplant episode, from evaluation through follow-up care. Two of the five national payers also have begun using bundled payments on a limited basis for other procedures. In 2009, one payer implemented bundled payments for bariatric surgery with providers in 22 states, and another payer implemented bundled payments for cardiac bypass surgery and other cardiac interventions in one hospital. All five national payers told us they generally signed a single contract with the hospital and physicians to bundle payments for transplants, and they processed bundled payments manually. The payers contracted with high-quality transplant centers that first met minimum volume and quality criteria established by national transplant organizations and were then willing to accept a competitive bundled payment rate. The payers typically signed a single contract, usually with large, urban teaching or tertiary hospitals and physicians who were either hospital employees or in hospital-affiliated practice plans. Payers paid the hospital, which then paid physicians and other providers. In addition, all five payers told us that both payers and providers processed claims for bundled payments manually because their claims systems were not designed to group hospital and physician claims related to an episode of care. Payers, representatives from physician specialty societies, and experts we interviewed stated that while bundled payments were feasible for Medicare, there were several obstacles to overcome. Among the factors noted that contributed to the feasibility of bundled payments in Medicare were that the ongoing Medicare bundled payment demonstration had increased providers' acceptance of bundled payments; and that bundled payments for transplants at the payers' centers of excellence resulted in savings--an important consideration in light of Medicare's financial challenges. Factors that could hinder wider use of bundled payments for Medicare included manual claims processing, which all five payers told us would be less viable for higher-volume services; that standard definitions for an episode of care do not exist; and that limiting provider choice under the selective contracting used for transplant networks may pose problems for Medicare FFS beneficiaries, who are used to a wide choice of providers since Medicare generally allows participation by all willing providers that meet certain standards.

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