Medicare’s Flawed Bundled Payment Experiment

Medicare’s Flawed Bundled Payment Experiment
October 26, 2011

John C. Goodman

John C. Goodman is a senior fellow at The Independent Institute and author of the widely acclaimed... (read full bio)

For several years now, scholars have been calling for a radical change in how Medicare pays doctors and hospitals. Instead of having Medicare set millions of prices for predetermined packages of care, we should allow providers the opportunity to produce better and cheaper care by repackaging and repricing their services.

Everyone on the provider side should be encouraged to make Medicare a better offer. Medicare should accept these offers provided (1) the total cost to government does not increase, (2) quality of care does not decrease, and (3) the provider proposes a reasonable method of assuring that (1) and (2) have been satisfied.

Instead of maximizing against reimbursement formulas, doctors and hospitals would be encouraged to discover more efficient ways of providing care. They would be able to make more money for themselves as long as they save taxpayers money and patients don’t suffer.

Health and Human Services Secretary Kathleen Sebelius recently seemed to indicate she has heard the call. Yet there are flaws in her approach which could very well ruin the experiment.

Bundling Payments

Going forward, providers will be able to offer to perform heart surgery and other procedures for a lump sum (bundled) price covering all aspects of the procedure, and (like Priceline) they can name their own price. Medicare will accept the offer if taxpayers are likely to come out ahead on the deal.

Unfortunately, Medicare will dictate what the bundles will look like. Providers will be able to re-price, but not repackage. Yet, ironically, re-pricing without repackaging could actually make things worse.

How can such a reform produce savings? Let’s say there are six members of a team involved in treating a heart-attack patient, but with efficient care five could do the job. If the six are independently billing Medicare, no one has an incentive to sacrifice his own income so that care can be more efficient. But if they can cooperate and bill Medicare a single fee (to be shared by the group) they can free one person per episode for other income-earning opportunities. They can then split the total income among themselves in a way that leaves everyone better off.

Repackaging Is Key

The federal government has experimented with Medicare bundled payments since 2009 in a demonstration program at Hillcrest Medical Center in Tulsa and produced Medicare savings of 3 percent. That’s a far cry from the 30 percent waste that most of us think is in the system.

The savings were so puny because this type of reform is focused on the least important thing that needs to be changed. Being able to repackage the bundles of care has far more potential for cost reduction than re-pricing a bundle dictated by Medicare.

To appreciate what the freedom to repackage might mean, consider Geisinger Health System in Central Pennsylvania. It offers a 90-day warranty on heart surgery, similar to the type of warranties found in consumer product markets.

If the patient returns with complications during that period, Geisinger promises to provide treatment without sending the patient or the insurer another bill. Instead of offering a bundle called “heart surgery,” therefore, Geisinger is offering a bundle called “heart surgery with a warranty.”

Current System Discourages Re-Bundling

Under the current system, Geisinger loses money on its warranties, even as it saves money for Medicare overall. This is because health care organizations like Geisinger are paid more when patients have complications that lead to more visits, more tests, and more readmissions.

What is needed is a willingness to pay for such guarantees. But unless Medicare is willing to allow Geisinger-type re-bundling along with re-pricing, other hospitals will have no incentive to follow in Geisinger’s footsteps.

Let’s take a primary-care example. A clinic drew up a blueprint to shift a large portion of doctor duties to nurses, allowing the doctors to focus on more complicated problems for which their training is needed. They then ran their model through a computer to see how it would have affected last year’s income. The result: there was virtually no improvement. The reason: every time a task was shifted to a nurse, Medicare’s payment rate went down, destroying any potential income gain.

We cannot solve this problem by inviting the clinic to underbid Medicare’s current price list. We solve it by allowing the clinic to offer a doctor/nurse package with acceptable quality for a price well below the price Medicare would pay for the all-doctor package.

Sebelius’s Huge Step Backwards

The reform Sebelius is proposing might actually make things worse.

The whole scheme will be a huge step backwards if it completely ignores and excludes innovative bundling. It will also fail if it continues to enforce the Stark rules which effectively prohibit physicians and hospitals from cooperating and sharing in the profits from bundled services unless the physician is an employee of the hospital, or if it suspends the Stark prohibitions only for physicians practicing in Accountable Care Organizations.

If these suppositions are all true, we will be left with a scheme to induce the consolidation of medical care into large organizations of salaried doctors, subject to all kinds of bureaucratic controls.

What appears to be an act of liberating the supply side of medical care could in reality be a clever ruse to enslave health care providers by coaxing them into accepting the building blocks of ObamaCare.

John C. Goodman

John C. Goodman is a senior fellow at The Independent Institute and author of the widely acclaimed... (read full bio)