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Bundled Payments: Is it time for health care providers to start acting like general contractors?


Imagine what college tuition would look like if higher education charged on a fee-for-service model, suggested Harvard Business School luminary Clayton Christensen. Education would be broken down into specific services, and students would be charged separately for each lecture they attended, each test they took, each hour they spent in a lab. It would be “a nightmare,” says Christensen. “How do you price English Literature 335? How would you price Chemistry 311? The value of courses is not knowable.”

And yet somehow we tolerate health care doing just that—breaking down services, making up prices, incentivizing providers to make more money by doing more to the patient. It’s unsustainable, said Christensen at the inaugural Advisory Committee meeting of University of Utah Health Care’s Institute for Health Care Transformation. 

Playing in the Same Economic-Incentive Sandbox 

Recent media attention has exposed the wild variation in the cost of common procedures, such as hip surgery (anywhere between $10,000 and $125,000) and an appendectomy (from as little as $1,529 to as much as $182,955). Christensen advised the group that it’s time to move from a fee-for-service system to a bundled payment system and have health care start playing by the same economic rules and incentives that other industries use. 

Consider the way homebuilding works, proposed Christensen. A contractor quotes a price to the buyer, negotiates with subcontractors and delivers on a service schedule defined in a contract. If the contractor meets the deadlines and stays within the budget, all is well. If not, he or she must renegotiate. Likewise in health care, the responsibility to stay on budget should be the responsibility of the principal accountable provider. 

In a bundled payment model for a hip replacement, the provider would have to estimate the appropriate cost for each aspect of treatment, such as the surgeon’s fees, operating room fees, cost of post-acute care, among others. The provider/general contractor would have to manage a team of subcontractors, or subproviders, to take care of each patient, be responsible for all aspects of the procedure and manage a team to provide quality care within the contracted quote. 

That process would not only control costs, but also foster a more collaborative and risk-sharing approach to care, by rewarding cooperation and coordination between providers to streamline the procedure and meet the projected outcome goals. In that way, a bundled payment system incentivizes providers to offer the best quality, leading to the best outcomes, for the most reasonable costs. And that equals value. 

Payment Aligned With Outcomes 

Not everyone believes the fee-for-service model should be abandoned or that bundled payments are a critical step toward reforming our health care system. (See an OpEd by Stephen Kemble, M.D.,  and blogs by Rob Lazerow.) But momentum seems to be moving in that direction with Medicare leading the way with the Medicare Bundled Payment Pilot program, which went into effect January 1, 2013. Both employers (Wal-Mart, Mayo Clinic, Cleveland Clinic) and commercial insurers (Intermountain Health Care, Vanderbilt Medical Group and others) are close behind, investing in bundled payment plans

As changes to health care payment models shifts into high gear, we are free to wonder about the next step in the affordable health care transformation. Will the employers, insurers and health care systems that enthusiastically embrace bundled payments have an advantage over those more reluctant to change? Tell us what you think. 

By: Jen Jenkins