If you haven’t read Part 1 of this post, please do so. In that part, I try to explain the main drivers of cost in our health care system.
Now that everyone has a basic grasp of the drivers of cost in our health care system, I want to try to show how the proposed changes to the system will have little effect on lowering cost in the system.
Through the Affordable Care Act, government is now moving towards “bundled payments” as a means to reduce health care costs. In the current system, providers receive separate reimbursements for each of the multiple services a person may receive during a specific illness or injury. For example, a patient with chest pain may have an EKG. The hospital gets paid for doing the EKG. The cardiologist gets paid for interpreting the EKG. The emergency physician gets paid for acting on the results of the EKG. If the patient is later admitted, the hospital gets paid for the use of the hospital bed and gets paid separately for the medications the patient receives or for the machines that the patient uses. Doctors get paid separately for visiting the patient in the hospital.
Bundling would add up all the payments for a given medical event and lump them into one. Instead of the government making separate payments to the hospitals, physicians, and other providers, the government pays the hospital one fee for everything and lets the hospital divide payments.
Bundled payments are touted as a means to improve quality and reduce mistakes.
CMS considers Bundled Payments for Care Improvement.
Ezekiel Emanuel in the New York Times “Opinionator” blog says that, as a means to “save real money and improve care,” we should embrace bundling and eliminate fee-for-service.
A New York Times editorial also noted how “most [unnamed] experts agree” that the solution to spiraling fee-for-service costs is to pay providers “fixed sums” to manage a patient’s care and then decide which services are truly necessary.
“Once you have a bundled payment, the delivery system can really do anything they want because the money’s on the table,” Cortese said. “But the incentive is to get it right the first time. If there’s a failure, you have to redo it on your nickel.”
A 2009 USA Today article noted that not only is the government advocating bundling of services, but it is also paying patients to go to hospitals that accept bundled payments. One 79 year old patient on a fixed income said that the government
bribe, er, um “incentive payment” helped to “seal the deal” for her because the $271 check she received from the government for going to the hospital would come in handy for “helping get my car fixed.” I think that it is good that the federal government acknowledges it is appropriate to provide “incentive payments” to encourage patients to go to certain hospitals. Wait. Isn’t that illegal? Oh well. You call it a bribe, they call it a tax refund. Have to look at that in another post some day.
Before getting into medical payment models, I want people to think about how bundling would affect us in the real world if we implemented it outside of health care.
Imagine that you were going to receive a bundled payment of $100 for ten pieces of winter clothing. What would you do? I know that I would go to my closet and find the 10 cheapest pieces of clothing there. Some of the gloves with holes in them, a ratty old scarf, maybe an unmatched boot. I wouldn’t even think about giving up a wool coat or a leather coat. If I could find 10 pieces of clothing that cost less than $100, I’d complete the deal. If you only had high-quality or expensive clothing in the closet, you’d probably pass because you’d lose money.
Point #1 is that sellers of bundled goods or services have an incentive to cut costs in order to make a profit. Those cuts must be either to the quantity of services or to the quality of services. There’s no other variable to change.
Next example. Imagine going into a supermarket to purchase a bundle of 3 pounds of bananas for $1. If you are a purchaser of bundled services, you want the best product that your money can buy. Wouldn’t you pull off all the bruised bananas and toss them back onto the table? After all, why should you pay good money for something you aren’t going to be able to eat? No one wants damaged bananas. When enough damaged bananas have accumulated on the table, then the grocer collects them all and dumps them in the garbage.
Point #2 is that consumers of a bundled services want the best quality for their money.
We’re already seeing a conflict arise from bundled payments. But I’m not done yet.
Another example. Suppose that a group of five people was going to receive a payment totaling $100 for 10 items of their winter clothing. How would that affect the goods being supplied and the payment being made? No one would want to contribute expensive items, so it is likely that every person would contribute the lowest quality clothing that they had available. After ten items had been contributed, then the five people would begin to argue about payments. The arguments would center around the relative value of the items they contributed because each person wants the maximum “cut” of that $100. Gloves should only count as one item – that person should get half as much. Wool gloves are worth more than a yarn hat – that person should get less. No one really uses scarves any more – that person should get less.
Point #3 is that there is no simple way to bundle payments to multiple entities for the same services. Doing so will always create arguments over how that payment is divided.
One last example. Suppose that you were purchasing three pounds of bananas, but those bananas were in a black bag and you could neither see the bananas nor could you remove the bruised bananas. You had to accept the bundle sight unseen. Would you still make the purchase? Maybe some shoppers would try it. If they had a good experience, they might purchase more. Other shoppers would be upset because they lost money on a bag of bananas that were in really bad shape. But, at most, they would be out a buck.
Now imagine that the grocery store wanted you to accept bundling of all your produce in a dark bag, sight unseen, in one payment of $100 for the whole year. Would you do it? Some people might. Many people probably wouldn’t. Then the grocery store would entice people into the program. We’ll only charge you $50 per year. Isn’t that a great deal?
Once enough people accepted that model, then the grocery store might go to an exclusive bundling model where they didn’t sell produce any other way. Then the grocery store might expand that model to grains and then to beverages and then to dairy products.
Once the grocery store had achieved a relative monopoly, it could then make significant modifications to the consumers of the bundled products. This year, they’re increasing the price to $150 for bundled produce.
Some people might go other places to buy produce.
If not enough people paid the higher prices for produce, then the grocery store could create a
law, er um rule, making produce purchase mandatory as a condition of purchasing other groceries. For example, if consumers don’t purchase bundled produce, they can’t purchase bundled meat or bundled dairy products, either.
The idea here is to get a large market share to adopt a payment model and then once that model has reached a “critical mass”, then turn around and use the widespread acceptance of that model to the disadvantage of the market.
A similar analogy might be a corporation’s abuse of a salaried employee. A company might agree to pay an employee a set salary for performing a set of specifically delineated services. After the relationship is established, the company wants to save money, so the company makes cuts to the staffing. The remaining workers now have to perform the services the fired employees were performing, but have to perform those tasks for the same salary. Then the company fires more employees and widens the scope of the services that are required in order to keep the same salary. Finally, in order to cut even more costs, the company decreases the salary, but increases the scope of services that are needed to earn that salary. By this time, there are so few employers left that the company is able to impose an economic hammer on the workers. Either you accept our policies or chances are that you won’t have any employment at all.
Oh, and if you don’t perform your services flawlessly, you might be sued for millions of dollars.
Although I have honed in specifically on how bundling can be misused, Point #4 is that widespread policies in either a monopoly or a monopsony tend to benefit only the monopoly or the monopsony. Those policies tend not to benefit the people who provide services on behalf of the monopoly/monopsony, or those who use the services provided.
Well, I had hoped to finish this topic with two posts, but it looks like there will have to be a third focusing on how bundling will affect medical costs.
Again, comments are encouraged. If I’m missing something or have misrepresented something, let me know.