Care Redesign

Bundled Payment in the U.S.: The Slow March Is Almost Over

Article · November 25, 2015

Close to 50 years ago, in March 1967, a landmark article described how to change the unit of analysis in medical care from an individual service to a medical episode. It’s a simple concept, after all: Instead of looking at and analyzing a set of seemingly disjointed services, group them into an episode that defines an illness, an injury, or a treatment. In doing so, suggested Jerry Solon, PhD, of the University of Pittsburgh, it is possible to start making real inferences about the inputs (health care services) that generate an output (treating a patient).

Since then, dozens of papers and articles have been written on episodes of care and their incarnation into a payment modality that, today, is referred to as a bundled payment. In fact, a 2012 report from the Congressional Budget Office identified bundled payments as the only Medicare payment demonstration project to date that had showed clear savings. And yet, despite the simple and intuitive nature of Solon’s observations, payments for episodes of medical care remain a rarity in U.S. health care. Let’s try to understand why this is so and how that can and will change.

Slowed by Inertia and Poor Wiring

The first and most obvious impediment to widespread adoption of episodes as the unit of accounting, analysis, and payment is the inherent threat it represents to all those who benefit from fee-for-service payment. Consider that the basis for the health care market’s inertia — the resistance of the incumbents to changing the volume and direction of the money flowing in the current system — is counted in trillions of dollars. Who willingly will forgo their portion?

The second and less obvious reason is the state of the wiring of all health care transactions. Think of it as analogous to the state of telephone or cable wiring: Billions of miles of copper and other wires transport signals to stations, then to satellites, back to land stations, and then through more wires to someone’s home. Ripping out and replacing with a far more efficient wire, such as fiber optic, or replacing all wires with cellular towers, requires a considerable capital investment. Those who made that transition early on acted on faith that consumers would prefer mobile telephony.

In the health care industry, billions of transactions flow daily through very simple “wiring” — the claims systems — that was designed to read in each unit of service and pay it at an agreed-upon rate. This simplistic one-to-one relationship is exactly what Solon decried as preventing clinicians from gaining real insights on patient care. Today, it continues to prevent the large-scale move to bundled payments. It may be surprising that in the middle of the second decade of the 21st century, the U.S. health care industry is being hampered by 20th-century claims systems. But that is the hard truth.

Take, for example, the July 2015 announcement by Medicare to launch a mandatory bundled payment program (Comprehensive Care for Joint Replacement Model) in 75 geographic regions by January 1, 2016. Surely, this seems like the early stage of realizing Solon’s goal. But the program is limited — unnecessarily — by the significant administrative constraints of the vendors who process claims. For example, Medicare insists that all bundles be initiated by hospitals because the claims systems can’t figure out how to start such an episode of care outside a hospital setting. That precludes some of the more efficient providers of joint replacements from participating, thus, significantly limiting the impact of the program.

Such limitations have more profoundly affected efforts to pay for the pro-active management of patients with chronic illness. While Medicare and private sector payers have long understood the potential of bundled payments for managing chronic diseases, the ability to operationally execute a program to harvest that potential is almost non-existent. Medicare, for one, has shelved attempts to launch episode of care-based payments for ambulatory care — sensitive conditions such as diabetes, heart failure, and asthma.

Private Plans and Some States Driving Demand for Episodes of Care

We seem stuck in a quandary, knowing that bundled payments bring value for patients, providers, and payers, yet we are incapable of fully exploiting their potential. Fortunately, solutions are actively being developed in the private sector at the behest of forward-looking health plans. CIGNA, Horizon Blue Cross Blue Shield, Blue Cross and Blue Shield of North Carolina, and others are sending out requests for proposals to their claims adjudication vendors, demanding working solutions for refined value-based payment programs. Similarly, the states of Arkansas, New York, Ohio, and Tennessee are forging ahead with wholesale changes in Medicaid payments and emphasizing the importance of episodes of care. These shifts are finally creating the market demand — the business case — for solutions to emerge.

As a result, 21st-century innovation is about to hit the decades-old infrastructure for health care transactions. When that happens, and it will by early 2016, the shift will be swift and catch the incumbents unprepared, much as mobile telephony surprised the landline operators.  Perhaps by the 50th anniversary of Dr. Solon’s paper, the simple vision he laid out will be the reality of the land.

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