Health Reformer's Lexicon: Bundled Payments

The Health Reformer's Lexicon is a weekly feature that will examine key words, terms and phrases in health reform and explore their meaning and orbit.

The term: Bundled payments

The RAND Corporation defines bundled payments—also known as “episode-base payments”—as “a single payment for all services related to a specific treatment or condition … possibly spanning multiple providers in multiple settings. Providers would assume financial risk for the cost of services for a particular treatment or condition as well as costs associated with preventable complications.”

The Robert Wood Johnson Foundation and George Washington University’s Health Reform GPS project adds: “In contrast to fee-for-service payments, which can encourage a high volume of treatment, ‘bundling’ is thought to encourage more cost-effective care.”

(Bundling payments first requires categorizing different types of medical cases. These categories are known as diagnosis-related groups, or DRGs, which Medicare uses to bundle reimbursements to hospitals for inpatient care.)

Why it matters: A root cause of many of the U.S. health care system’s most profound problems—including soaring costs and uneven quality—is the fee-for-service payment system, which encourages overuse of health care services and fails to reward value. Among the alternative options, bundled payment schemes are attractive because they give hospitals and physicians incentives to coordinate care and to provide it more efficiently. Tied to evidence-based medical practice, bundling also promises to increase the value of our health care system—producing better outcomes for patients—in a fair and equitable way.

Roots: Physicians at the Texas Heart Institute introduced bundled payments in 1984 for cardiovascular surgical procedures. A 1987 study found that the Health Care Finance Administration could decrease its costs by more than $192 million (13 percent) under Texas’ payment plan. Since then, as U.S. health care expenditures have ballooned, health reformers have continued to advance the idea of bundling as a way to reform the fee-for-service payment system. The Balanced Budget Act of 1997 established new payment systems for most types of post–acute care services; independent initiatives such as PROMETHEUS Payment have worked on the practical design and implementation of evidence-informed case rates; and President Obama championed bundling in the recent health care reform debate.

Where the term appears: The final health reform bill calls for the creation of a national Medicare pilot program by the beginning of 2013, which will develop and evaluate bundled payment systems for acute inpatient hospital services, physician services, outpatient hospital services and post–acute care services for episodes of care that begin three days prior to hospitalizations and last an additional 30 days following discharge.
 
Under the new law, the government must also set up Medicaid pilot projects by 2012 that will use bundled payments to pay for episodes of care that include hospitalizations.

The Centers for Medicare & Medicaid Services is already experimenting with bundled payments through its Acute Care Episode demonstration, with sites in Texas, Oklahoma, Colorado and New Mexico.

And recently, several major health care providers in California announced plans to use bundled payments to pay for hip and knee replacements beginning in August. The lump-sum fee will cover a full range of medical treatments from surgery to 90 days of recovery.
 
Previous Lexicon entries include:
- Flexible Spending Accounts
- Value-Based Purchasing
- High-Risk Pools