Are Bundled Payments the Answer?

Fee for service has to go, that much we know. Among its many flaws as a reimbursement system, perhaps its greatest is that it offers few financial incentives for preventative medicine and primary care, which will become increasingly important to meeting the growing demand for healthcare services in coming years.

So the multi-billion dollar question now is: What replaces fee for service? We've seen wish lists from CMS and other industry players for more emphasis on pay for performance and similar types of value-based purchasing, but absent from the discussion has been consensus on an overarching payment structure to replace the current one.

One of the leading candidates has been a bundled payment system that reimburses physicians and hospitals for episodes of care, such as months of cancer treatment, that under the current system involve many separate billable procedures. Medicare is piloting a program in which bundled payments are split between physicians and hospitals, and some private insurers are experimenting with it as well.

When it comes to large scale reform, this payment system lost a strong advocate this week when Tom Daschle withdrew from consideration as nominee for Health and Human Services Secretary, but be careful about reading too much into that. Senator Max Baucus (D-MT), who may play a large role in shaping healthcare reform as chairman of the Senate Finance Committee, also favors bundled payments, as do other influential policy makers, according to the Wall Street Journal.

I can certainly see the appeal. It is in many ways a "middle road" that seeks to avoid the pitfalls of fee for service without venturing into capitation, which pays a fixed rate per patient and has been criticized for creating incentives for providers to cut costs and withhold treatments for patients.

But healthcare policy makers didn't see many of those unintended consequences coming when capitation was touted as a physician reimbursement solution, just as many of the flaws in the fee-for-service model weren't always apparent. So before moving forward with a bundled system, policy makers should carefully examine the incentives it will create and do their best to foresee possible unintended consequences.

Take hospital and physician relationships, for instance. In some cases, when bundled payments are made for hospital-based episodes of care, the hospital is in charge of doling out the money to physicians. And if you can't see the potential problems that will cause, you haven't been paying attention to the healthcare industry.

Physicians are worried that they will have to constantly negotiate with hospitals to receive a fair share of the payment—that may be less of a problem as more hospitals employ doctors outright, but it could hurt relations with those in private practice. And because many of these episodes of care involve multidisciplinary teams, physicians are already competing with one another to make a case for why their specialty deserves a larger piece of the pie.

Proponents of bundled payments are trying to avoid many of these hurdles by adding caveats and conditions for payment. But the more complicated any payment system becomes, the more likely it is that payments will influence provider behavior in ways that haven't even been considered.

If policy makers aren't careful, their worthwhile attempts to fix the flaws in the fee-for-service system may just create a whole new set of problems.