Controlling Healthcare Costs: The Bureaucratic Obstacles to "Payment Bundling"

Last Updated Apr 27, 2010 8:30 AM EDT

Health-insurance companies and healthcare providers in California are trying out a new form of financial risk-sharing known as "payment bundling," that holds some promise for controlling overall health costs. But like a similar Medicare demonstration project, the approach will be limited to expensive elective procedures. It's much less clear how well payment bundling will translate to the care of chronic diseases such as diabetes or heart trouble, which drive about three-quarters of health spending.

California's Integrated Healthcare Association (IHA), which supervises a pay for performance (P4P) program that includes all the major insurers, has been developing a payment bundling system for a few years. The IHA project stems from employers' and health plans' dissatisfaction with P4P, which has led to improved quality and greater use of information systems but hasn't slowed cost growth.

Four payers -- Aetna (AET), Cigna (CI), Blue Shield of California and Health Net (HNT) -- have negotiated bundled payments with several of the state's leading healthcare providers, including Cedars-Sinai Medical Center in Los Angeles, the UCLA Health System, and Hoag Memorial Hospital Presbyterian in Newport Beach. In August, these providers will begin charging lump sums for hip and knee replacements. The contracted amounts for each "episode" of care will cover hospital care, physician services, tests, and most other aspects of medical care from admission through 90 days after discharge.

The hospitals and physicians will share in the savings if the episode of care costs less than the negotiated budget, usually because the patient recovers faster than expected. If complications arise, the providers will eat the costs of any additional procedures and hospitalizations.

This approach raises some interesting questions about how the providers will collaborate. If they were all part of a single organization, the money would be distributed according to that organization's rules. But if some or all of the surgeons are independent of the hospital, the providers will have to decide how to share the gains and losses. And if some of the tests are done in a participating doctor's office, how are those accounted for? Moreover, many physicians in California belong to large medical groups and independent practice associations that contract directly with HMOs. It's unclear how the bundled payments will be separated from those relationships.

One thing that seems certain is that there will be a big push to use less expensive artificial joints. In fact, the hope of reducing device costs is a major reason why the insurers support payment bundling. So if bundling catches on, medical device makers will be affected. But pharmaceutical companies probably won't feel any pain since most hospitals already have "formularies," or lists of preferred drugs.

Because drug costs and other economic inputs, such as labor costs, will remain constant, some experts are skeptical that payment bundling will save very much. Even if it does have an impact in areas of medicine such as orthopedic and cardiac procedures, it will be much more difficult to apply to chronic diseases.

A physician must have at least 30 patients with a particular condition for the data on his or her cost of care to be statistically valid. According to an IHA study, only 75 conditions were prevalent enough for California medical groups and IPAs to have 30 patients with one of those conditions in a given year, and only 28 of the conditions were prevalent enough for two-thirds of the groups to have that many patients. Also, partly because of prepaid care, claims data on diagnosis and treatment were very poor. Although payers can use claims data across many organizations to overcome the small-numbers problem, the lack of good data and the problem of how to divide up the money still create major barriers to payment bundling for chronic care.

Better methods to calculate bundled payments will be devised, but the bigger problem is how to get providers to work together. If they can't do it in a state with as many large groups as California has, it would be miraculous if they could pull it off anywhere else.

Image supplied courtesy of me and the sysop at Flickr.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.