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Why Bundling Payments Won’t Reduce Costs – Part 2

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.

Mayo Clinic President Denis Cortese was quoted as saying that bundled payment plans prompt hospitals to deliver the best possible care:

“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.

19 Responses to “Why Bundling Payments Won’t Reduce Costs – Part 2”

  1. doc99 says:

    Bundled Payment suggests Medical Services as sold by Ron Popeil or the late Billy Mays.

  2. CancerDoc says:

    Bundling payments is NOT going to increase quality of care to patients….patients should be screaming about the idea.

    They are already bundling payments for patients receiving HD….I was sent a patient with a low platelet count. We started therapy. I figured she could have the monitoring CBC’s drawn at the HD center since she was there 3 times a week. That has never been an issue in the past. Now with bundling, I was ….WRONG. We were told that was “outside the protocol” and they routine check only hgb/hct for monitoring procrit. It’s a simple, little thing, but I think it illustrates what happens.

    If everyone is on bundled payments, we are going to see a very scary game of way too many people trying to avoid testing/expensive therapies so that it doesn’t come out of their pocket. Yes, that will drive down costs, but patient care will suffer. Of course, there is the threat of malpractice, but in my community, I think you would find many doctors just telling people, “you’re too sick, I can’t take care of you. Go to be the Big City.”

  3. ER Jedi says:

    I appreciate the way you are breaking this all down and its interesting to read and muse over. But as they say, “Don’t bring me problems, bring me solutions”. What’s your answer to all this?

    • Matt says:

      Exactly. Because physicians have come up with no solutions other than tort reform, which has yet to reduce health costs after decades of trying it, the ultimate way costs will be reduced is simple: Cutting payments.

      The time is coming when we simply can’t afford to spend all we’re spending, on everything. And so the government simply won’t.

      Physicians will either be pushed back out into the free market or will accept drastically reduced salaries in exchange for receiving government money.

    • I also echo this. What solution do you propose? We know most of the problems with health care but how to solve them is the nearly insurmountable problem we all face.
      I even agree with Matt for once on his comment that we rely too much on cutting medical malpractice costs/jury awards as a panacea to solving all the ills.

    • DensityDuck says:

      This is like someone telling you to stop shooting yourself in the foot, and you reply “well where ELSE should I shoot myself?”

  4. ED Talker says:

    This deeply misrepresents the concept of bundled payments. You have ignored that those who receive the payment are responsible for the outcomes of their patients. You have ignored that outcomes will be tracked and publicly reported. You have ignored that poor outcomes will be the responsibility of those who chose how to distribute and use the payments. The incentive will be, necessarily, to spend less while achieving better outcomes.

    This model leads the rest of the industrialized world to better health care and better outcomes at, on average, half the price per capita.

    Your examples misrepresent bundling, and seem to be laced with conspicuous fear mongering. Please do not represent this as a factual description of how bundled payments are conceived (or executed anywhere).

  5. Ian Random says:

    A better example is a buffet. Lots of low quality food at a great price. But if I got to a real restaurant I get a set quantity of real good food.

  6. David Wander says:

    Interesting set of analogies, but only time will tell if bundling works. Pilot programs are up and running and the only question is whether unnecessary procedures will be reduced, meaning savings. The test of that is if the costs come in lower without any decline in health outcomes. That will mean that hospitals and doctors were really billing for unnecessary procedures. If conversely, health outcomes decline, the billings will be largely vindicated.

    • DensityDuck says:

      In other words, “bundling” is a way of stealthily introducing limits on care. If you just straight-up denied payment then there’d be a great hue and cry about how Medicare Wants You To Die. But if it’s just not part of the bundle, well, who can complain about that? What, you’re greedy, you want it better than everyone else gets? Well ain’t you Mister Specialpants.

  7. drhawk says:

    I lve the way people, who have probably never been outside of the USA speak about other countries health care systems with such authority and with such great hopes.

    I am not denying that someother countries have good models, but the reality is that people still pay for their care, and the care, most of the time, is at a level that would probably not be accepted by US patients, whoops, meant consumers.

    most palces with socalised medicine, bundles payments, whatever you want to call it have
    1) no malpractive, or low rates of malpractice awards
    2) low to no cost for medical education
    3) low to no cost of malpractice
    4) HIGH taxes, approaching >50pct
    5) limits on services, be they waitlists, controlling the number of docs allowed to practice, or some options and treatments which are just no offered

    Also, the hospitals do not have the hotel quality that seems to be expected in the USA. 6 to 8 people per room or bay is common. curtains only separating patients. how woudl that go over with hippa here? usually private rooms are for people who are willing to pay extra, or have private health insurance. common bathrooms, hows that. dont believe me? check out almost any BBC show where they show the inside of a NHS hospital. I have never been there, but hear germany and france are even worse.

    there is also a huge difference in ER wait times, forget being seen in 30 minutes or less as most US hospitals do. you ae lucky to be seen the same day. staffing is done by senior trainees, not fully qualified docs. that is how the costs are less, less trained people operate the system

    this is not to mention the countless other ways that would not go over well given the myriad of US rules and regs.

    please do your researchbefore saying how great things are in other countried. having worked in several system here and overseas, we have the best healthcare you can get, bar none.

    • DensityDuck says:

      Mexico has a low rate of malpractice suits because they have an entire government department dedicated to denying malpractice lawsuits. If only America were so lucky!

  8. drhawk says:

    I lve the way people, who have probably never been outside of the USA speak about other countries health care systems with such authority and with such great hopes.

    I am not denying that someother countries have good models, but the reality is that people still pay for their care, and the care, most of the time, is at a level that would probably not be accepted by US patients, whoops, meant consumers.

    most palces with socalised medicine, bundles payments, whatever you want to call it have
    1) no malpractive, or low rates of malpractice awards
    2) low to no cost for medical education
    3) low to no cost of malpractice
    4) HIGH taxes, approaching >50pct
    5) limits on services, be they waitlists, controlling the number of docs allowed to practice, or some options and treatments which are just no offered

    Also, the hospitals do not have the hotel quality that seems to be expected in the USA. 6 to 8 people per room or bay is common. curtains only separating patients. how woudl that go over with hippa here? usually private rooms are for people who are willing to pay extra, or have private health insurance. common bathrooms, hows that. dont believe me? check out almost any BBC show where they show the inside of a NHS hospital. I have never been there, but hear germany and france are even worse.

    there is also a huge difference in ER wait times, forget being seen in 30 minutes or less as most US hospitals do. you ae lucky to be seen the same day. staffing is done by senior trainees, not fully qualified docs. that is how the costs are less, less trained people operate the system

    this is not to mention the countless other ways that would not go over well given the myriad of US rules and regs.

    please do your researchbefore saying how great things are in other countried. having worked in several system here and overseas, we have the best healthcare you can get, bar none.

  9. Joseph Nowoslawski says:

    Excellent piece. Given the desperation of the policy makers and their “something for nothing” promises to get elected, they are counting on most of the public, and suprizingly, the Healthcare care establishment to miss a basic business principle. You nailed it:

    “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.”

    And it is not like they did not see it before…remember pre HMO days…..

    Keep on writin….

  10. Joseph Nowoslawski says:

    Reading the responses…..what to do….do these learned “answer seekers” realize that if one strips out all of the government imposed mandates on healthcare sector that the true increase in healthcare every year would average that of other sectors?

    Don’t people get that regulations have costs and those costs have to be paid by someone?

    You want the answers to the question to reduce costs…here is is…stop regulating healthcare….open it up….(yes that includes not licensing physicians….and nurses etc) stop requiring hospitals to admit non payers and you will see costs drop….that is to say if all you want is cost control. If you haven’t guessed it already this is happening by letting professional assistants do physician tasks with encouragement of the regulators.

    If on the other hand you want a “guarnteed sucess” of outcome in a biologically uncertain and complex arena like illness (remember physicians get sued if the patient outcome is not perfect) then you have to pay for what you get. High quality costs high dollars.

    I can see the arguments on statistics coming forth…however…save your time and ask the question why everyone in the world wants to come to the USA to get their healthcare before quoting media dribble.

  11. ED Talker, on 12/17/11 at 1:23 PM quite rightly said: “This deeply misrepresents the concept of bundled payments.” (See: for a cogent list of its advantages and disadvantages.) Indeed, the term refers to having a common denominator for payment, usually called an ‘episode of care that looks at Donabedian’s structure, process and outcome (SPO) of care, simultaneously.

    My point is Outcomes research has never been more crucial to health care reform then now. It is the final arbiter first mentioned to us by Florence Nightingale in the mid-1800′s and then E. A. Codman, an ortho in Boston who, even then, couldn’t get the hospitals to disclose their real data.

    Joseph Nowoslawski commented on 12/27/11, “If….you want a ‘guaranteed success’ of outcome in a biologically uncertain and complex arena like illness (remember physicians get sued if the patient outcome is not perfect) then you have to pay for what you get. High quality costs high dollars.”

    Don’t be so trite, Joe–paying for performance must take an acuity adjusted look at SPO. It cannot ignore both the ‘art’ and ‘science’ of medicine. For example, guidelines or standards must not be prescriptive (no cookbook medicine allowed here). We have to reduce barriers to care (the hassle factor, for instance, and also, patients should have some skin in the game, but not so much that they delay getting appropriate (medical necessary) care.

    Why Bundling Payments Won’t Reduce Costs — Part 3: a blog from inside the emergency department

    For related commentary see ManagingManagedCare.com (live but being updated).

    • Joseph Nowoslawski says:

      Healthcare is not complicated. You get what you pay for. High Quality costs High Dollars. Have you ever received something for nothing? Why is that concept so hard to accept in all other fields except medicine. Do you manage your Chevy into a Rolls on the car lot? Not!

      We can go do the rabbit hole of terms/management toys but when we are done with the vector motions we come to the total outcome of the system. That outcome is less than what expectations have bee put forth in this system in this country.

      Bottom line promises were made but there are not enough resources to keep those promises. There never were.

      Managing the limitation of the performance of those promises with intellectual belly button fuzz does not fulfill those promises…

  12. It is curious that my comment did not get posted. Regardless, redefining health care in terms of acuity-adjusted ‘episodes of care,’ considering the Donabedian perspective–looking at structure, process and outcomes, especially in terms of measurement and management is absolutely essential if we want to be paid fairly for our cost-effectiveness. If, OTOH, we are only happy being paid on a piecework basis (where the incentive is to generate pieces) or we are forced into being assigned, arbitrarily into an Accountable Care Organization – we will neither be helping medicine nor our patients, optimally.

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