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REFORM: How "Bundling" Can Save Us a Bundle

As promised, more on MedPAC. This post focuses on the Medicare Payment Advisory Commission's ideas on changing the way we pay doctors and hospitals.

As a physician, I'm impressed by the June 2008 MedPAC report because it's truly a comprehensive rethinking of how to reform health care finance and delivery in the United States. Prior MedPAC reports have recommended measures to improve quality such as paying doctors and hospitals for performance, usually with a few percent bonus for good results; correcting imbalances in the fee-for-service payment system; or reporting the rates at which doctors and hospitals use certain services. Those pay-for-performance programs have improved the quality of care in many hospitals. But they certainly have not reduced the cost of care, which as numerous researchers have shown varies wildly among individual hospitals, individual doctors, and U.S. regions.

This report recognizes the central fact of reforming the delivery of medical care: It can't be done as long as doctors and hospitals are paid through the traditional fee-for-service system. Because in that system, doctors and hospitals are basically paid by the piece. The higher the volume of services provided, the greater the revenues. If fees are cut, doctors increase their volume to make up for the lost revenues.

Medicare pays hospitals by Diagnostic Related Groups (DRGs). Hospitals are paid more for patients who have complications at discharge, even if those complications are hospital-acquired. In a significant change, Medicare is now refusing to pay for some preventable hospital-acquired complications or errors, known as "never events." But if a patient has multiple complications, as is common, the hospital is still paid more for them. (Incidentally, the Boston Globe reported this week that Massachusetts' state health programs aren't going to pay for certain preventable conditions identified by the National Quality Forum. According to the Globe, it's the first state to take such a step.)

The MedPAC report calls for something new. It recognizes that under the current system, hospitals have few financial incentives to reduce complications and shorten length of stay. MedPAC proposes "bundling" payments of doctors and hospitals for one episode of care. (The report acknowledges that the details of how to divvy up those payments are complex and will require some experimentation.) This arrangement will mean that efficient doctors will be worth more to a hospital than inefficient doctors; and it follows that efficient doctors, providing quality care, will be paid more. MedPAC recognizes the difficulty of pricing a bundled episode. For elective hospital admissions, such as non-emergency surgery, it will probably be straightforward because the patterns of response to surgery are usually predictable. For emergencies, however, the hospital course is less predictable. Quite a bit of work will be required to get the price points right, but all in all, this is a far-sighted report that gets straight to the issue of the perverse payment incentives in fee-for-service medicine and offers a pathway forward.