Michael AbramsCongress passed the Patient Protection and Affordable Care Act (ACA) in 2010 to broaden availability of healthcare insurance coverage and to control spiraling premiums and underlying costs. The legislation was an indicator of the pain caused by our expensive and inefficient healthcare system. The reality is that healthcare costs have continued to outpace other sectors of the economy, and as the government’s share of this cost burden increases, the way that we pay for and deliver healthcare in this country will have to change.

One payment model that’s gaining steam as a means to realign incentives toward better health outcomes at lower cost is bundled payment. In fact, a group of industry experts convened by the Center for American Progress and including former CMS director Don Berwick, former Obama Administration healthcare advisor Ezekiel Emanuel, and former Senate Majority Leader Tom Daschle has urged the federal government to accelerate the adoption of bundled pricing. It’s becoming increasingly clear to stakeholders across the industry that when properly designed, bundled payment strikes the right balance in avoiding both the overutilization seen under fee-for-service payment (i.e., by motivating efficient care) and the underutilization of capitation (i.e., by giving providers incentives to order tests and treatments when necessary).Rita Numerof

It’s All About the Money

Despite the window dressing, when you get right down to creating change in any industry, it’s all about the money—who pays, for what, and how. Economic incentives work in a  nuanced way, both consciously and subconsciously, and drive decisions. As long as healthcare delivery continues down the path of fee-for-service payment without regard to outcomes, the tendency to do more to make more will remain strong.

The downsides of fee-for-service payment are well known. In fact, CMS has attempted to deal with the problem for decades, as evidenced by efforts such as DRGs in the 1980s. Unfortunately, CMS never connected prospective payment to outcomes, and predictably, quality problems increased along with continuously rising costs. 

What has long been recognized in other industries is that quality and cost must be addressed together, and consumers need to have line of sight to the value they receive to make informed choices. Even seemingly low-hanging fruit, like reducing readmission rates, will require realignment of incentives toward more efficient health care. 

Why Will Bundled Payment Do Any Better?

By promising to deliver a standardized set of services for a fixed price with specific quality commitments, providers will effectively be given incentives to contain underlying cost drivers, without incentives for underutilization, as were seen with HMOs and capitation in the 1980s. Taking action on such issues as overutilization, technology choices, and inadequate coordination across the care continuum can drive meaningful change in quality and outcomes if providers are uniformly focused on these outcomes without the distortions caused by the current fee-for-service approach. A simultaneous focus on developing a differentiated clinical value case will ensure a balanced approach that doesn’t forgo quality and safety for the sake of economic efficiency. 

Moreover, payers—both public and private—are increasingly seeing the appeal of this model. Under the gun to slow cost growth, they are looking for a solution, and the opportunity to offload financial risk is an added plus. Because of its fixed price and quality commitments, bundled payment provides a mechanism to accomplish both objectives; providers that exceed their budget or fail to deliver what they’ve committed to will bear the consequences (as they would in any other industry). Creating a predictable cost structure for a defined set of services with a desired outcome can also be a powerful mechanism for differentiation at the provider level. 

Looking beyond the short-term competitive appeal to payers, healthcare delivery organizations that wait too long to develop bundled pricing may not have a choice—bundled payment may become a competitive requirement, imposed by payers. So the decision facing providers today is whether they would rather build bundled prices on their own terms, or wait for payers to force bundled payments on them.

Finally, offering bundled prices for episodes of care will move the healthcare delivery system to a more consumer-oriented model. The customer of the future wants comparable evidence of health outcomes delivered for a set total price. As in any other market, the winning provider will have the best answer to “What am I getting for my money?”

Competing with a Bundled Price

So when providers develop a bundled price, what next? How can they make sure that their bundles are better than anyone else’s? The answer is that the care that’s offered has to be differentiated, delivering more value as defined by payers and consumers. 

The market share winners in this environment will be those providers that can define and deliver on better health outcome metrics. And these metrics need to go beyond traditional mortality and morbidity measures. Competing with a bundled price requires considerable transparency of information, responsive to the needs of a more engaged, value-conscious consumer. It will also require providers to develop a better understanding of cost drivers within the boundaries of a bundle of care. Every unnecessary or suboptimal resource used means a hit to the bottom line when the organization is committed to a fixed price. Finally, it will require providers to routinely monitor utilization and outcomes, by diagnosis and by physician, with processes and infrastructure to address unnecessary variation. That is a step that is long overdue. Despite these challenges, bundled pricing offers a promising means to reform our healthcare delivery system, realigning incentives for better health outcomes at lower cost. 


Michael N. Abrams, M.A. is managing partner, Numerof & Associates, Inc., St. Louis.

Rita E. Numerof, PhD, is president, Numerof & Associates, Inc., St. Louis.

Publication Date: Tuesday, January 29, 2013