The Bungling of Bundled Payments

Obamacare’s two chief goals were to cut the number of uninsured and reduce the cost of health care. At least one of the law’s primary ways of fulfilling the latter goal appears to be failing.

The RAND Corporation recently examined a pilot effort by several California hospitals to replace their conventional fee-for-service model with “bundled payments.” Rather than pay for all the individual components and procedures that go into a knee replacement, for example, insurers just remit one lump sum for the entire episode of care.

The initiative started in 2010. Four years later, the results are not promising. Indeed, as the RAND researchers reported, “The pilot did not succeed.”

That shouldn’t be a surprise. Bundled payments are just price controls by another name — and as such, will yield subpar care by encouraging insurers and providers to put their own financial interests above the medical needs of patients.

Champions of bundled payments argue that they could trim costs by 25 to 50 percent if implemented for just six common chronic conditions and four that typically require hospitalization.

But the evidence thus far does not support their optimism.

When the California pilot began, eight hospitals and six of the state’s biggest insurers joined. But six of those hospitals and three of those insurers dropped out before actually signing contracts to use bundled payments.

According to the RAND report, the dropouts quickly concluded that bundled payments would neither change the delivery of care nor lower costs.

“That was unexpected,” said Susan Ridgley, the RAND study’s lead author. “Hospitals began to see that it required too much time and effort or maybe that it was not in their best interest.”

Consider the experience of the Hoag Orthopedic Institute, the largest orthopedic surgery facility in California. The institute was an ideal test subject because it performs thousands of knee and hip surgeries each year — common procedures where doctors can reasonably predict how long treatment will take. Theoretically, these types of procedures would accommodate a payment system based on a patient’s “episode” of care well.

After joining the pilot program, Hoag signed more contracts and patients than any other participant. But as the Institute’s Surgeon-in-Chief wrote in Health Affairs, it could not attract enough patients to cover the costs associated with the experiment.

The RAND study also reported substantial administrative headaches for the entities that participated. Healthcare organizations had to process payments manually because the software designed to handle bundled payments cost in excess of $1 million.

Providers were reluctant to make investments that big if they weren’t sure they were going to save money.

The failure of the California pilot was not the first time bundled payments had faltered. Between 2008 and 2011, RAND evaluated PROMETHEUS Payment, a similar bundled-payment pilot in Illinois, Michigan, and Pennsylvania. Three years into that project, not a single bundled payment contract had been executed.

Bundled payments also give healthcare providers a financial incentive to skimp on patient care.

They put a price on a patient’s life — and treat every patient as if they’re the same.

Consider a hypothetical patient who suffers a heart attack. If the bundled payment for that episode of care amounts to $50,000, the hospital will do everything it can to keep the cost of the care it delivers below that figure.

And if the patient is better served by a course of treatment that exceeds the bundle? The hospital will have to make a decision about whether to take a loss — or deny the patient the care he needs.

To avoid that decision, hospitals may “upcode” — that is, classify a condition as worse than it is in order to get more money from the episode. If they do so, much of the savings promised by bundled payments will vanish as providers simply make their diagnoses more severe — and more expensive.

Upcoding is already a problem in Medicare. The U.S. Department of Health and Human Services has reported an almost 50 percent uptick in billing for Medicare patients’ doctor visits in the last decade — despite the fact that there’s little evidence that the average patient has grown sicker or requires more complex care.

Bundled payments may also lead providers to discriminate against high-risk patients. The flat fees give doctors and hospitals an incentive to seek out patients who are unlikely to experience complications — like the young and healthy. Older or sicker patients, who cost more to treat, may find it difficult to get care.

Despite the failures of the pilots — and the risks to patient care — the government is, of course, looking to expand bundled payments.

The Centers for Medicare and Medicaid Services announced this August that they were increasing the number of providers eligible to consider using bundled payments to almost 6,500. So far, a mere 243 providers have signed on.

Their reluctance should be clear — bundled payments burden healthcare providers and threaten the quality of patient care. But that’s just par for the course for Obamacare.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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