A Foundational Component to Reducing Healthcare Costs – Bundled Payments

The challenge of reducing healthcare costs in the U.S. is analogous to our country trying to be energy independent. Both are complex, achievable, will take time to solve and require a combination of solutions. Until we discover technological breakthroughs that cost effectively meets the market demand, challenges can be overcome with existing resources.

A foundational component to reducing the cost of healthcare is a reimbursement model for hospitals and physicians called “Bundled Payments”. This form of reimbursement addresses one of the underlying reasons for the escalating expense of healthcare. This is the misalignment of how hospitals and physicians are compensated. For example, hospitals are paid a set fee by Medicare for patients with a specific diagnosis. So regardless of how long a patient is in a hospital or the number of medical tests performed, the hospital is not compensated any more than the specified amount. Therefore, hospitals are incentivized to deliver high quality healthcare in the most cost effective manner for a patient’s specific medical condition. Contrary to this approach is the manner in which physicians are compensated. Their compensation is not tied to the most cost effective healthcare. Therefore, there is no incentive for physicians to refrain from having additional medical tests, specialist consults and additional services performed which may be overtreatment for a patient’s particular condition.

What Bundled Payments reimbursement does is align the goals of a hospital and physicians to deliver the most cost effective healthcare without sacrificing quality of care or services.  The way this works is both the hospital and physicians develop a partnership where they accept a set payment for a particular medical diagnosis. This payment level is usually discounted from the average reimbursement rate or it could remain at the current level. Both the hospital and physicians go at risk in delivering services for the set payment. It is incumbent on both the hospital and physicians to work collaboratively delivering the highest quality of care at the lowest cost for each patient. If the costs of healthcare services exceed the payment level, both the hospital and physician financially lose money. Conversely there is a financial upside for both the hospital and physicians if they are able to manage the costs at a rate lower than they are being reimbursed. The excess savings is shared between the hospital and physicians as a bonus payment. Therefore, both the hospital and physicians are incentivized to keep healthcare costs low and quality high.

This methodology of reimbursement requires the physician who is making the decisions on each patient’s treatment to judiciously decide when additional tests and specialist consults are necessary. The more additive costs associated with the patient’s treatment, the less financial revenue for the physician and hospital to share. Also this form of reimbursement creates a disincentive for a physician and hospital to deliver less than adequate care to a patient for financial gain. If a patient has complications or is readmitted due to inadequate treatment, there is no additional payment for the healthcare services rendered. The hospital and physician jointly bear the expense.

As a partner with the physician, the hospital’s responsibility is to focus on reducing operational and supply costs while providing the physician support with infrastructure and personnel to deliver high quality care. The hospital also takes on the role of advisor sharing with the physician their performance data compared to peers and national benchmarks. The objective is to jointly work together at identifying the best demonstrated clinical practices so all of the physicians can learn and improve their clinical performance. A downstream benefit is the patients and community receives high quality care at the most cost effective price.

This partnership between hospitals and physicians with shared financial incentives and risks creates a unique dynamic. Both parties have a vested interest to both support and hold each other accountable to deliver cost effective healthcare. As these financial incentives are aligned, physicians and hospitals work jointly to reduce the cost of healthcare and improve clinical outcomes. The broader results are a constraint on the upward trajectory of escalating healthcare costs and an incremental step of making healthcare affordable for more individuals. Presently this reimbursement model is not widely practiced and has been around since the late 1990’s. With a renewed focus on reducing healthcare costs and lessons learned from past approaches (e.g. managed care), this form of reimbursement is starting to gain a renewed traction in the market.

As I noted, Bundled Payments is a foundational component to reducing the cost of healthcare. Due to the complexity of the issues around healthcare delivery, varying patient diagnosis and associated costs, it doesn’t work well for all medical conditions. For example, chronic health conditions that require ongoing treatment and physician monitoring such as diabetes, does not work under the Bundled Payments reimbursement model. There are also other medical situations that do not lend itself to Bundled Payments as an appropriate form of reimbursement. Therefore, we need to combine various payment models for our hospitals and physicians that reward them for the best clinical outcomes at the most cost effective approach. The other underlying component to controlling healthcare costs is the behaviors of the general population which is beyond the scope of this blog.

To be successful in solving our healthcare challenges, it takes more than changing the manner hospitals and physicians are reimbursed to promote the more appropriate decision making. It will also require a shift in the mindset of physicians, hospital executives and caregivers on how to embrace these models and make them work versus feel that this is another means of reducing their financial compensation. I have seen anecdotal examples of how organizations and physicians can thrive on this model. It requires the right mental approach with a level of creativity and learning how to calibrate the most appropriate and medically necessary treatment for each individual patient. Until technological breakthroughs are discovered that solve our healthcare and energy challenges, we need to learn how to manage within the capabilities available. The solution is here and we just need to look at how to solve the problem differently than reapplying the same tried and true approaches which don’t fit an ever changing environment.

Comments are closed.