How Bundled Payments Just Might Save Health Care From Itself

In the 1960s, Texas Instruments developed the first handheld calculator. It could display up to 12 digits while performing addition, subtraction, multiplication and division. And it cost $2,200.

Since then, the calculator has come a long way. Competition forced continuous innovations, and today’s models are more lightweight, have longer battery life, are capable of performing more complex computations –all at a dramatically reduced price point.

That’s the typical cycle in virtually every sector of the American economy. Innovations are introduced, competition forces design improvements and cost reductions and products are continually improved until the next big thing comes along to start the process over again.

But that’s not the way things work in healthcare.

Like the calculator, Medicare was first created in the 1960s.

But even though the practice of medicine has changed dramatically over the last 40 years, the Medicare program has stayed largely the same. And, since most commercial insurers tend to follow the government’s lead in terms of payments and benefit design, even private markets have played a role in limiting innovations in the way we pay for healthcare.


Typically, government programs have layered on more and more regulations, sticking on band-aid policies to address new models of care delivery, new medical enhancements and new care settings. Predictably, the result looks a lot like Frankenstein’s monster – a mess of stitched together policies and competing incentives that keep healthcare in the dark ages, directly leading to waste, inefficiency and consumer frustration.

Consider just a couple examples of this dysfunction at work.

Today, many insurers have detailed lists of about 7,500 “activities” they will pay doctors to perform in service of their patients. Decades old, advancements such as email consultations with patients or electronic recordkeeping do not qualify for reimbursement.

The result has seriously retarded the practice of medicine and kept electronic communication out of the industry. Nearly every American business communicates with customers over email, yet in healthcare, only about a fifth of patients have ever emailed their doctor, and less than 2 percent say they do so regularly. Instead, we have an inefficient and antiquated way of doing business, requiring patients to make appointments and take time off work to have face-to-face office visits that could easily be conducted virtually.

Similarly, most insurers do not pay doctors to coordinate care for beneficiaries, many of whom may need hospital, outpatient, ambulatory and prescription drugs at various points in their treatment. Because providers aren’t paid to work as a team, they have no incentive to steer people toward the highest-quality, cost effective sites of delivery. And with no reliable information on cost and quality for patients, it is not uncommon for them to choose less than ideal options, such as visiting a hospital rather than seeking urgent care for a minor fall.

Clearly, we need a new way of doing things.

Last year, the Department of Health and Human Services announced a “bundled” payment program that would allow providers to bid as a team for fixed price reimbursement for common treatments, including those that require pre- and post-hospital care such as heart surgery or hip and knee replacements.

Paying for care in its entirety, rather than having providers all bill insurance companies separately, has advantages that directly benefit patients. For one, paying a fixed price for physician payment, nursing care, surgery and medications incents providers to collaborate to ensure the best outcomes – if any link in the chain fails,  that adds to the cost and providers will have to dip into their own pockets to fix it. In the case of Geisinger Health System, such financial incentives led to dramatic improvements in quality, including a 21 percent reduction in complications, a 25 percent reduction in surgical infections and a 44 percent drop in readmissions.

Similarly, paying a fixed price has been shown to lower costs. A Medicare heart bypass surgery bundled payment demonstration saved $42.3 million, or roughly 10 percent of expected costs, and reduced patients’ insurance costs by $7.9 million while improving care and lowering mortality rates. Other experts estimate that if we moved to bundling for just six chronic conditions and four conditions requiring hospitalization, providers could shave between 25 to 50% off the costs associated with avoidable complications by providing higher-quality, more collaborative care.

Our healthcare system has waited far too long to make these critical changes. Instead, we’ve been limping along, attempting to fix regulation with more regulation, which has created myriad known pitfalls for consumers, not to mention the federal budget. People and providers want to work together to improve health, but this can only be done when we start rewarding innovators who embrace flexibility and ingenuity. Bundled payments are a good start. Let’s hope for more.

Wes Champion is senior vice president of Performance Partners for the Premier healthcare alliance, a collaborative network of more than 2,600 hospitals and health systems, 88,000 other healthcare sites and 400,000 physicians