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

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.