Bundled payment

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Bundled payment, also known as episode-based payment, episode payment, episode-of-care payment, case rate, evidence-based case rate, global bundled payment, global payment, package pricing, or packaged pricing, is defined as the reimbursement of health care providers (such as hospitals and physicians) "on the basis of expected costs for clinically-defined episodes of care."[1][2][3][4][5] It has been described as "a middle ground" between fee-for-service reimbursement (in which providers are paid for each service rendered to a patient) and capitation (in which providers are paid a "lump sum" per patient regardless of how many services the patient receives).[6] Bundled payments have been proposed in the health care reform debate in the United States as a strategy for reducing health care costs, especially during the Obama administration (2009–present).[7]


In the mid-1980s, it was believed that Medicare's then-new hospital prospective payment system using diagnosis-related groups may have led to hospitals' discharging patients to post-hospital care (e.g., skilled nursing facilities) more quickly than appropriate in order to save money.[8] It was therefore suggested that Medicare bundle payments for hospital and posthospital care;[8] however, despite favorable analyses of the idea,[9][10] it had not been implemented as of 2009.[11]

Bundled payments began as early as 1984 when The Texas Heart Institute under the direction of Denton Cooley began to charge flat fees for both hospital and physician services for cardiovascular surgeries.[5][12] Authors from the Institute claimed that its approach "maintain[ed] a high quality of care" while lowering costs (e.g., in 1985 the flat fee for coronary artery bypass surgery at the Institute was $13,800 versus the average Medicare payment of $24,588).[12]

Another early experience with bundled payments occurred between 1987 and 1989, involving an orthopedic surgeon, a hospital (Ingham Regional Medical Center), and a health maintenance organization (HMO) in Michigan.[5][13] The HMO referred 111 patients to the surgeon for possible surgery; the surgeon would evaluate each patient for free.[13] The surgeon and hospital received a predetermined fee for any arthroscopic surgery performed, but they also provided a two-year warranty in that they promised to cover any post-surgery expenses (e.g., for four re-operations) instead of the HMO.[13] Under this arrangement, "all parties benefitted financially": the HMO paid $193,000 instead of the $318,538 expected; the hospital received $96,500 instead of the $84,892 expected; and the surgeon and his associates received $96,500 instead of the $51,877 expected.[13]

In 1991, a "Medicare Participating Heart Bypass Center Demonstration" began in four hospitals across the United States; three other hospitals were added to the project in 1993, and the project concluded in 1996.[1][14] In the demonstration, Medicare paid global inpatient hospital and physician rates for hospitalizations for coronary artery bypass surgery; the rates included any related readmissions.[1] Among the published evaluations of the project were the following:

  • In a 1997 analysis, it was estimated that in 1991-1993 the original four hospitals would have had expenditures of $110.8 million for coronary artery bypasses for Medicare beneficiaries, but that the change in reimbursement methodology saved $15.31 million for Medicare and $1.84 million for Medicare beneficiaries and their supplemental insurers, for a total savings of $17.2 million (i.e., 15.5%).[1] Of the total savings, 85%-93% was attributable to inpatient savings and another 6%-11% was attributable to postdischarge savings; furthermore, there was "no diminution in quality."[1]
  • A 1998 report to the Health Care Financing Administration (now known as the Centers for Medicare and Medicaid Services) noted that in the five years of the demonstration project the seven hospitals would have had expenditures of $438 million for coronary artery bypasses for Medicare beneficiaries, but that the change in reimbursement methodology saved $42.3 million for Medicare and $7.9 million for Medicare beneficiaries and their supplemental insurers, for a total savings of $50.3 million (i.e., 11.5%).[14] In addition, controlling for patient risk factors, the inpatient mortality rate in the demonstration hospitals declined over the course of the project.[14] The negative aspects of the project included difficulties in billing and collection.[14]
  • A 2001 paper examining three of the original four hospitals with comparable "micro-cost" data determined that "the cost reductions primarily came from nursing intensive care unit, routine nursing, pharmacy, and catheter lab."[15]

By 2001, "case rates for episodes of illness" (i.e., bundled payments) were recognized as one type of "blended payment method" (i.e., combining retrospective and prospective payment) along with "capitation with fee-for-service carve-outs" and "specialty budgets with fee-for-service or 'contact' capitation."[16] In subsequent years other blended methods of payment have been proposed such as "comprehensive care payment",[5] "comprehensive payment for comprehensive care",[17] and "complete chronic care"[18] which incorporate payment for keeping people as healthy as possible in addition to payment for episodes of illness.

In 2006-2007 the Geisinger Health System tested a "ProvenCare" model for coronary artery bypass surgery that included best practices, patient engagement, and "preoperative, inpatient, and postoperative care [e.g., rehospitalizations] within 90 days... packaged into a fixed price."[19] The program received national attention including articles in the New York Times [20] and the New England Journal of Medicine[21] in mid-2007. An evaluation published in late 2007 showed that 117 patients who received "ProvenCare" had a significantly shorter total length of stay (resulting in 5% lower hospital charges), a greater likelihood of being discharged to home, and a lower readmission rate compared with 137 patients who received conventional care in 2005.[19]

The Robert Wood Johnson Foundation gave grants beginning in 2007 for a bundled payment project called PROMETHEUS ("Provider payment Reform for Outcomes, Margins, Evidence, Transparency, Hassle-reduction, Excellence, Understandability and Sustainability") Payment.[22] With support of the Commonwealth Fund, the project developed "evidence-informed case rates" for various conditions that are adjusted for severity and complexity of a patient's illness.[23][24][25] The "evidence-informed case rates" are used to set budgets for episodes of care.[24] If actual quarterly spending by health care providers is under budget, the providers receive a bonus; if actual quarterly spending is over budget, payment to the providers is partially withheld.[24] The model is currently being tested in three pilot sites which are scheduled to end in 2011.[24][25]

In mid-2008, the Medicare Payment Advisory Commission made several recommendations along "a path to bundled payment."[26][27] For one, it recommended that the Secretary of Health and Human Services examine approaches such as "virtual bundling" (under which providers would receive separate payments, but could also be subject to rewards or penalties based on the levels of expenditures).[26] In addition, it recommended that a pilot program be established "to test the feasibility of actual bundled payment for services around hospitalization episodes for select conditions."[26]

Just before the Medicare Payment Advisory Commission report was released, the Centers for Medicare and Medicaid Services announced a "Medicare Acute Care Episode (ACE) Demonstration" project for bundling payments for certain cardiovascular and orthopedic procedures.[28] The bundling includes only hospital and physician charges, not post-discharge care; by 2009, five sites in Colorado, New Mexico, Oklahoma, and Texas had been selected for the project.[29] In the project, hospitals give Medicare discounts of 1%-6% for the selected procedures, and Medicare beneficiaries receive a $250–$1,157 incentive to receive their procedures in the demonstration hospitals.[30]

Bundled payments for Medicare were a major feature of a November 2008 white paper by Senator Max Baucus, chair of the Senate Finance Committee.[31] The white paper recommended that the Medicare ACE Demonstration "expand to other sites," "focus on other clinical conditions if certain criteria are met," and "include services that are provided post-hospitalization."[32]

As of 2008, Geisinger's ProvenCare program had "attracted interest from Medicare officials and other top industry players"[2] and had been expanded or was in the process of being expanded to hip replacement surgery, cataract surgery, percutaneous coronary intervention, bariatric surgery, lower back surgery, and perinatal care.[33] Interest in Geisinger's experience intensified in 2009 when newsmedia reports claimed that it was a model for health care reforms to be proposed by President Barack Obama[34] and when Obama himself mentioned Geisinger in two speeches.[7][35]

In July 2009, a Special Commission on the Health Care Payment System in Massachusetts distinguished between episode-based payments (i.e., bundled payments) and "global payments" that were defined as "fixed-dollar payments for the care that patients may receive in a given time period... plac[ing] providers at financial risk for both the occurrence of medical conditions and the management of those conditions."[3] The Commission recommended that global payments "with adjustments to reward provision of accessible and high quality care" (not bundled payments) be used for Massachusetts health care providers.[36] Among the reasons for selecting global payment were its potential to reduce episodes of care and previous experience with this payment method in Massachusetts.[36]

As of 2010, provisions for bundled payments are included in both the Patient Protection and Affordable Care Act and the Affordable Health Care for America Act.[37] The former bill establishes a national Medicare pilot program starting in 2013 with possible expansion in 2016,[38] which is consistent with the Obama proposal.[37] The latter bill requires "a plan to reform Medicare payments for post-acute services, including bundled payments."[37]


Advocates of bundled payments note:

  • Unlike fee-for-service, bundled payment discourages unnecessary care, encourages coordination across providers, and potentially improves quality.[5]
  • Unlike capitation, bundled payment does not penalize providers for caring for sicker patients.[5]
  • Considering the advantages and disadvantages of fee-for-service, pay for performance, bundled payment for episodes of care, and global payment such as capitation, Mechanic and Altman concluded that "episode payments are the most immediately viable approach."[39]
  • Researchers from the RAND Corporation estimated that "national health care spending could be reduced by 5.4% between 2010 and 2019" if the PROMETHEUS model for bundled payment for selected conditions and procedures were widely used.[40] This figure was higher than for seven other possible methods of reducing national health expenditures.[40] In addition, RAND found that bundled payments would decrease financial risk to consumers and would decrease waste.[41]
  • Bundling payment provides additional advantages to providers and patients alike, through removing inefficiency and redundancy from patient-care protocols; e.g. duplicate testing, delivering unnecessary care, and failing to adequately provide postoperative care.
  • This method of payment can also provide transparency for consumers by fixing pricing and publishing cost and outcomes data. Patients would be able to choose a provider based on a comparison of real data, not word of mouth.
  • Bundled payments may also encourage economies of scale - especially if providers agree to use a single product or type of medical supply - as hospitals or integrated health systems can often negotiate better prices if they purchase supplies in bulk.[42]


Before practices choose to participate in bundled payments, they need to be diligent in researching potential episodes of care that would be amenable to this type of reimbursement. Once they have selected and defined an episode of care, they should:

  • Identify all associated costs,
  • List all services provided within the episode of care,
  • Calculate how the care episode would be reimbursed, and
  • Identify how many entities would share in reimbursement.[43]


The drawbacks of a bundled payment approach include:

  • The scientific evidence in support of it has been described as "scant."[3] For example, RAND concluded that its effect on health outcomes is "uncertain."[41]
  • It does not discourage unnecessary episodes of care;[5] for example, physicians might hospitalize some patients unnecessarily.[26]
  • Providers may seek to maximize profit by avoiding patients for whom reimbursement may be inadequate (e.g., patients who do not take their drugs as prescribed), by overstating the severity of an illness, by giving the lowest level of service possible, by not diagnosing complications of a treatment before the end date of the bundled payment, or by delaying post-hospital care until after the end date of the bundled payment.[4][26]
  • Hospitals may seek to maximize profit by limiting access to specialists during an inpatient stay.[30]
  • Because one provider may outsource part of the care of a patient to other providers, it may be difficult to assign financial accountability for a given bundled payment.[4]
  • There is an administrative and operational burden, for example in establishing fair compensation rates.[4][41] Small sample sizes and incomplete data may cause difficulties in calculation of proper rates for bundled payments.[44] If rates are set too high, providers may provide unnecessary services; if rates are set too low, providers may experience financial difficulties or may provide inadequate care.[5]
  • Some types of illnesses may not fall neatly into "episodes."[3]
  • It is possible that one patient may have multiple bundles that overlap each other.[45]
  • Academic health centers, which emphasize research, teaching, and new technologies, may be disadvantaged by the payment scheme.[45]
  • Providers risk large losses, for example if a patient experiences a catastrophic event.[46] A complex "reinsurance mechanism" may be needed to convince providers to accept bundled payments.[46]


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