Monday, July 7, 2008

Bundled Payments, Physician payments, Medicare, Doctors and Hospitals - DRGs in Drag? Bundled Medicare Hospital-Physicians Bills

You can look at the Medicare Payment Advisory Commission report1 recommending bundled hospital-physician bills in diverse ways, depending on your point of views.

• One, as a means of saving Medicare from bankruptcy by dumping costs into diagnostic bins, just as Congress did with DRGs in the mid-1980s, only this time dragging physicians into the mix.

• Two, as an attack on fee-for-service’s perverse financial incentives, as the primary cause of runaway Medicare costs by inviting uncoordinated physician greed by providing more services than needed.

• Three, as a way reducing variation in costs by “capitating” hospital care, long a goal to managerially-minded policy wonks, and to coordinate care by forcing hospitals and doctors to act in tandem.

• Four, as a mechanism to achieve transparency and predictable costs in advance, thriving forces behind the consumer-driven care movement which says consumers and payers may change their spending behavior on the basis of value and costs known in advance...

I lean towards the fourth interpretation because as chairman of a Physician Hospital Organization (PHO) nearly 20 years ago, I helped develop a series of over 50 bundled bills for an Oklahoma hospital.2

The through behind our PHO’s bundled bills was straightforward: estimate the hospital costs for a given episode of care or a given diagnosis or procedure, average the fee-for-service costs for physicians delivering these services, add hospital costs to physician costs, and back the total bundled bill with re-insurance if costs exceeded our estimates.

The motivation of our PHO was to attract consumers and payers to the hospital. If you give the matter any thought at all, you will realize consumers, health plans, government payers, and employers would be attracted to predictable costs they could budget for.

This approach doesn’t punish fee-for-service physicians. It potentially disciplines and rewards fee-for-service practitioners with more business. Unfortunately at the time we introduced bundled bill, health plans weren’t ready. They preferred to deal with hospitals and doctors separately with a divide and conquer strategy.

But, if I may use three time-honored clich├ęs, when costs spin out of control. timing is everything what goes around comes around, necessity is the mother of innovation.

The principals who direct or advise the Medicare Payment Advisor Commission (MedPAC) have a fundamentally different philosophical take, which they dub “collective accountability,” on the necessity for bundled bills.

I will let them speak for themselves,

“Medicare’s projected spending growth is unsustainable. The incentives inherent in the dominant fee-for-service payment system are the root cause. Fee-for-service spurs spending growth, support a fragmented and compartmentalized delivery system, and does nothing to reward quality or value… Under a bundled payment approach, Medical would pay a single provider entity (comprising a hospitals its affiliated physicians) a fixed amount intended to cover the costs of providing a full range of services during an episode, which might be defined as the hospital stay plus 30 days per disease. Bundling payments should provide incentives to increase efficiency, coordinate in-hospital and post-hospital care, and, if combined with pay-for-performance initiatives, improve the quality of care.”

Well. maybe. I’ve always been dubious about the effectiveness bureaucratic bullying cost-reducing billing clubs to reduce costs, especially when you factor in administrative overhead.

In any event, MedPAC proposes a two year pilot study focusing on episodes of congestive failure, chronic lung disease, and coronary-bypass grafting with cardiac catheterization. It adds a cautionary note, “MedPAC is under no illusion that the policy of policy change outlined here is eas .Unforeseen consequences are likely and mid-course corrections will be needed. But a continuation of the status quo is unacceptable.”

I would add, once fee-for-service is out of the barn, herding it back won’t be easy, DRGs have been of limited effectiveness in reducing costs, and hospitals and physicians are likely to act at the edges of care outside of hospitals to compensate for government policy changes. .


1. Glenn Hackbarth, J.D., Robert Reischauer, PhD, and Ann Mutti, M.P.A, “Collective Accountability for Medical Care – Towards Bundled Medicare Payments, “ New England Journal of Medicine, July 3, 2008.

2. Richard Reece, MD, Innovation-Driven Health Care: 34 Concepts for Transformation, Jones and Bartlett, 2007


Marshall Maglothin said...

I agree with your choice of perspective of #4 and add: A bundled DRG reimbursement can also finally finacially align hospitals and physicians though quality improvement endeavors. Thus, the expert who controls the majority of the hospital's procedural costs, the physician, may be financially rewarded by the hospital for achieving quality indicators which improve patient care and reduce costs, thus increasing the hospital's profit under the bundled model.

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