Research: Implementing Packet Payment System in the Health Care facilities Of Missouri and Nationwide
Prepared by: Abubakar Binji
Figure 1:
| Percentage of Costs Represented by Bundled Conditions | Baseline Spending (2012-2021) ($ in billions) | Cumulative Potential Savings (2012-2021) ($ in billions) | Cumulative Actionable Savings (2012-2021) ($ in billions) | ||
| $ | % | $ | % | ||
| 29% | 38.6 | $1.9 | 5% | $0.5 | 1.4% |
| 100% | 133.0 | $6.6 | 5% | $1.8 | 1.4% |
Baseline spending includes spending for all services that would be included under the proposed bundled payment program, such as hospital services, physician services performed during the hospitalization, and post-acute care provided within 30 days of hospitalization for the conditions and procedures listed.
Estimated savings assumes that 100 percent of services requiring hospitalization are bundled. This was concluded based on the fact that the modeled conditions currently account for approximately 29% of spending for all services that would be bundled. This assumes that the same level of savings can be achieved for all bundled services.
Articulated Policy and Major Impact on Health Care:
The articulated policy is that bundled payments system would consist of a single payment for all services provided to a patient during a period of treatment. It does not carry self-interested view against services, rather it would include hospital and physician care while in the hospital and in the post-acute phase, regardless of the number of services provided. These bundled payment rates should be adjusted for the strictness of the patient’s illness (risk adjusted) in order to account for the additional resources required to treat sicker patients. The payments can be made to the hospital or some managing entity that then distributes the funds to all the parties involved. Providers usually decide how bundled payments are dispersed among the hospital and physicians.
Finding the total benefits of using bundle payment method is essential in marginal analysis. Making health care choices for both the hospital and patient side may require marginal analysis- an analysis of additional benefits of an activity compared to the additional costs of that activity. Hospitals use marginal analysis as a decision-making concept to maximize their profits while reducing cost. Bundle analysis will do the same in comparing benefit of implementation versus cost of implementation. There is very few to little cost of implementing bundle payment system. To assume marginal analysis, current payment methods tend to reimburse hospitals on a per discharge basis, and physicians on a per service basis.
Although hospitals have financial incentive to manage a patient’s care during the hospital stay, there is little to no benefit or incentive to manage a patient’s condition following discharge. Physicians usually are paid for each service they provide, thus there is little financial incentive or little financial benefits while higher costs for them to manage utilization of additional tests and services for a patient in the hospital, or to manage a patient’s care after discharge to help avoid preventable readmissions.
Positive Impact of Bundled Payment:
- Evidence supports adopting a bundled payment methodology as a way to contain costs in Medicare and private insurance settings. An evaluation of the Medicare Participating Heart Bypass Demonstration found that it saved Medicare an average of 15 percent for bypass surgery patients in demonstration hospitals (with inflation adjustments). The Geisinger Health System in Pennsylvania implemented a bundled payment program for non-emergency coronary artery bypass graft (CABG) procedures (ProvenCare) in 2006 and demonstrated savings of 5 percent.
- Self-interest is the idea and process of motivating others to promote their own interest. I think the proposal of bundle payment system does not support self-interested ideas. This is because bundle payment methods include full range of services of a patient’s episode of care, including after treatment. Since bundled payments are usually based on an average of what it currently costs to provide the full range of services for an episode, hospital and physician groups could profit by reducing adverse events and controlling costs to below the average.
- Groups that cannot lower costs will lose money under the system. Thus, a bundled payment methodology creates incentives for hospitals and physicians to work together and manage a patient’s care throughout the entire episode of care.
Negative Impact Of Bundle Payment:
- A little to say about what could be the negative impact of this policy is that it may require significant changes in physician practice patterns and hospital operation, as well as investments in different strategies to reduce adverse events and preventable readmissions. The Affordable care Acts (ACA) calls for the establishment of a national pilot program on bundled payments for the Medicare program beginning in 2013. Although the final specifications of the program are left up to the Secretary of Health and Human Services (HHS), the ACA has specified a pilot program to cover 10 conditions. This includes an episode time period that begins three days prior to a hospitalization, called the “anchor” admission, and ends 30 days after discharge (assuming the three days prior to admission are included to encompass any pre-admission visits with the physician or hospital attributed to the admission). This includes the full cost of hospital readmissions that begin within 30 days of discharge from the anchor admission, including any portion of that readmission occurring outside the 30-day window (For example, the full cost of a readmission occurring on the 30th day following discharge from the anchor admission is included, including days of the readmission extending beyond the 30-day window). The bundled payment under ACA can include hospitals, physicians, skilled nursing facilities, and home health providers. As a major positive impact of this policy, this analysis is based on a bundled payment program design similar to the ACA specifications.
- Additional drawback of this proposed policy is that physician office visits were excluded. This could be because it is unlikely that some of these would be related to the initial stay; additionally, their costs tend to be small relative to the inpatient and post-acute care costs for individual episodes.
- The bundled payment creates incentives for hospitals and physicians to reduce the number of tests and other services a patient receives during an episode period. There are concerns, therefore, about the quality of care a patient receives when incentives are to provide fewer services. On the other hand, bundled payments may incentivize quality care to prevent costly readmissions and adverse events. To make sure that quality of care is not jeopardized, bundled payment model could (not will) be implemented with a pay for performance program to ensure that evidence-based standards of care are met.
The term “price” means amount of payment required to provide medical products or services. Research has shown that bundled pricing can align incentives for providers – hospitals, post-acute care providers, doctors, and other practitioners– to partner closely across all specialties and settings that a patient may encounter to improve the patient’s experience of care during a hospital stay in an acute care hospital, and during post-discharge recovery.
Market failure is a condition whereby the market fails to provide the expected ideal level of output. In its application, there is a great deal about pay-for-performance and the market failures it can mitigate, not to provide a recipe for implementation of a specific quality-based payment contract. Efficient payment method, like bundle payment should be used to address specific market failure in the existing payment system of care. For example, Medicare currently makes separate payments to providers for the services they furnish to beneficiaries for a single illness or course of treatment, leading to fragmented care with minimal management across providers and health care settings, which is a sign of market failure approach. Payment should be based on how much a provider does, not how well the provider does in treating the patient.
Policy Option:
The bundled payment model in this analysis included specific types of conditions and procedures, which were selected based on groupings of closely related DRGs (Diagnosis-related group). These selections were based on previous bundled payment studies, other bundling demonstrations and bundled payment systems including the Geisinger Health System, and the concentration of admissions in certain specialties. This policy analysis assumed that hospitals would be paid a single bundled rate that covers hospital inpatient stays and any readmissions occurring within 30 days of admission. The payment amount also would include post-acute rehabilitation, skilled nursing, home health services, hospital outpatient services, and payment for the attending physician and all consults.
The idea of supply and demand is important in health care because it predicts how much of products or services are needed in the marketplace and at what price it should be bargained. A very important policy question today is, what exerts greater cost control, supply- or demand-side cost sharing? The former puts the cost risk on providers (e.g., bundled payments, capitation). The latter on patients (e.g., higher deductibles and copayments). My view at the moment is that both supply- and demand-side cost sharing are appropriate, but for different types of care. To the extent care is supply sensitive, provider induced, not delivered via a shared decision making process, and/or eminence based, supply-side cost sharing would seem to deliver the right incentives. To the extent care reflects patients’ values and especially when it is based on evidence, demand-side cost sharing to signal relative costs and/or effectiveness of care to patients may be appropriate.
The scenario in this paper assumed that bundled payment rates are set at the average current spending for the bundle of services, as opposed to other bundled payment programs that set the rates equal to the average cost of services, less some allowance for expected reductions in adverse events or negotiated rates with hospitals.
Opportunity costs are the costs associated with the “opportunity” foregone when decisions are made, or resources are allocated to a certain area – necessitating that those same resources can no longer be applied elsewhere. The opportunity costs of savings from this bundled payment program were estimated under the assumption that hospitals and physicians are able to reduce costs for all these services — similar to findings under the Medicare Participating Heart Bypass Demonstration, which are estimated at about 10 percent; and Geisinger’s ProvenCare model, which showed about 5 percent savings. This analysis assumed the more conservative 5 percent savings and assumed that these savings would be passed on to insurers, and eventually to consumers, in the form of lower payment rate increases for these services over time. These system-wide savings were estimated assuming that bundled payment methodology is implemented in 2012 by all commercial insurers as well as Medicare and Medicaid programs. The savings estimates assume that the bundled payment program would be phased-in over three years and that it will take this full phase-in period before the full effect of these savings appears.
Estimated Effects of the implementation:
The term “market” or “niche” means consumer-focused entities that appreciate or consume the marketing products or services. For example, Medicare is a market provider for consumers who participate in their (Medicare) services. There is clearly a market for bundle payment method. This is because it shows estimation of savings under two options. The first option (Figure 2) reflects the impact on savings if all payers – Medicare, Medicaid, state and local governments, commercial health plans, and private ERISA (Employee Retirement Income Security Act) plan – changed their payment methodology. This option results in an estimated total savings due to the bundled payment program of $1.9 billion from 2012 to 2021. However, nearly half of these savings would be realized by the federal government, while the US State like Missouri would see savings of $182 million due to savings to the Medicaid program and employee health benefit programs. See below:
Figure 2: Estimated Savings by Stakeholder Group 2012-2021 ($ in millions) (Assumes bundled payments are implemented across all payers).
| Year | Federal Government | State and Local Governments | Private Employers | Households | Total Statewide Health Savings |
| 2012 | $28.6 | $6.0 | $14.6 | $12.3 | $61.4 |
| 2013 | $60.5 | $12.5 | $30.6 | $25.9 | $129.3 |
| 2014 | $81.7 | $16.8 | $39.5 | $37.1 | $175.1 |
| 2015 | $87.4 | $17.9 | $39.4 | $41.7 | $186.4 |
| 2016 | $93.2 | $18.9 | $40.5 | $45.4 | $198.0 |
| 2017 | $98.4 | $19.8 | $42.6 | $48.2 | $209.0 |
| 2018 | $104.5 | $20.7 | $44.4 | $50.7 | $220.3 |
| 2019 | $111.2 | $21.8 | $47.0 | $54.0 | $234.1 |
| 2020 | $118.8 | $23.1 | $49.7 | $57.7 | $249.3 |
| 2021 | $127.2 | $24.4 | $52.6 | $61.4 | $265.5 |
| 2012-2021 | $911.5 | $181.8 | $400.7 | $434.4 | $1,928.5 |
Estimates assume that episode savings are similar for Medicare and Medicaid patients and similar to privately insured patients within the same initial hospitalization category. Source: The Lewin Group estimates. Numbers may not add to totals due to rounding.
The articulated challenges of implementing this policy option would require dramatic changes in the state’s current Medicaid rate setting methodology, which is currently not a DRG-based system. This scenario assumed that the state will modify its payment methodology to allow it to effectively bundle payments for Medicaid and state employee programs. Furthermore, the state cannot compel Medicare and ERISA plans to use specific payment methodologies. This scenario also assumed that the state would require that all insurers participating in the Heath Benefit Exchanges adopt the bundled payment systems. Additional challenges in implementing the bundled payment approach would require that all providers in the state be required to accept these forms of payment for Medicaid and CHIP (Children’s Health Insurance Program) beneficiaries and the state employee health benefit programs.
Comparative Advantage is the ability to provide better, lower costs and more efficient products and services as compared to other provisions. If any organization decides to provide bundle payment methods, it will gain more competitive advantage and comparative advantage knowing that it is delivering reduced costs, improved quality and greater transparency. At a high level, the concept is a single fixed price for a defined set of physician and facility services with a specified quality outcome.
Based on the above assumptions of Figure 2, the second implementation option (Figure 3 below) reflects the savings that would result from changes in payment methodology in the Missouri Medicaid program as well as the state’s employee benefit program. In this option, the federal government would save $189 million under the program from 2012 to 2021 due to the federal match rate for Medicaid. State and local governments would realize savings of $170 million due to savings in the Medicaid and state employee health benefit programs. See below:
Figure 2: Estimated Savings by Stakeholder Group 2011-2020 ($ in millions) (Assumes bundled payments are implemented for Medicaid, state and local government health benefit programs and insurers participating in exchanges).
| Year | Federal Government | State and Local Governments | Private Employers | Households | Total Statewide Health Savings |
| 2012 | $5.3 | $6.0 | $0.0 | $0.7 | $11.9 |
| 2013 | $11.1 | $12.5 | $0.0 | $1.4 | $25.0 |
| 2014 | $16.3 | $16.2 | $1.6 | $7.1 | $41.2 |
| 2015 | $18.8 | $16.5 | $3.6 | $13.1 | $51.9 |
| 2016 | $20.6 | $17.1 | $4.7 | $16.7 | $59.2 |
| 2017 | $21.3 | $18.2 | $5.0 | $17.6 | $62.1 |
| 2018 | $22.3 | $19.1 | $5.2 | $18.3 | $64.9 |
| 2019 | $23.3 | $20.2 | $5.5 | $19.4 | $68.5 |
| 2020 | $24.5 | $21.5 | $5.8 | $20.6 | $72.4 |
| 2021 | $25.8 | $22.7 | $6.2 | $21.7 | $76.5 |
| 2012-2021 | $189.2 | $170.1 | $37.7 | $136.6 | $533.6 |
Source: The Lewin Group estimates. Numbers may not add to totals due to rounding.
Personal Position:
My personal basis from this projected policy estimated the effect of implementing a bundled payment system for conditions that together represent approximately 29 percent of hospital costs in the state. These include the most commonly provided hospital services, and services included in the CMS (Center for Medicare and Medicaid Services) bundled payment demonstration. In fact, bundled payments could be developed for all services involving hospitalization. If bundling reduces spending by 5 percent, as assumed above, total savings could reach $6.6 billion assuming bundled payments are implemented across all payers, and $1.8 billion if implemented for Medicaid, public employees, and the Health Benefit Exchanges over the 2012 to 2021 time period. However, it would take some time to develop payment systems for each individual hospital service. The model assumes payment bundles cover 30-day episodes, but longer episodes may be appropriate for some conditions such as diabetes.
This policy also assumes that the bundled payment model is implemented statewide and for every hospital. Therefore, there is clearly a problem of scarcity and choice. Not all hospitals will like to implement bundle payment system, which violated their freedom to choose. Although, it is not so much about the scarcity to provide bundle payment, but the choice and option of its acceptance. Scarcity means people want more products and services that are available for consumption and usage. Because the products and services will not satisfy all people, people have to choose (i.e. on what to consume and what not to consume). Implementation of bundled payment model may be easier to achieve in hospitals that already have collaborative relationships with physicians and other post-acute providers such as integrated delivery systems. Scarcity requires choice of medical payment method. Hospitals and health care delivery must choose which of their payment style they will satisfy and which they will leave unsatisfied (may even include the proposed bundle payment methods).
A potential negative impact is that implementing bundled payments may be more difficult for other hospitals that would need to ensure access to a network of physician specialties to perform all the services within the bundle. The hospital or some managing entity would need to establish contracts, billing, and distribution of payments for all the parties involved. Additional challenges of the implementation process is that it may not be possible to implement the program at every hospital right from the start, and may take several years for all hospitals to develop the necessary infrastructure. As discussed above, implementing bundled payments in Missouri would require significant changes to the state’s rate setting methodology. Adopting a bundled payment methodology would allow Missouri to transition from its current per diem, non-risk-adjusted, inpatient payment system to one that is focused on care coordination and recognizes severity of illness.
The State also would need to implement a number of requirements for State programs, and would need cooperation from Medicare and ERISA plans as well as providers for a bundled payment methodology to be effectively and successfully implemented.
“Competition” is a financial economic term that describes the idea of seeking a profit sharing for a product or service. In order to stay competitive, health care organizations need to understand that the model of bundle payment methods would provide opportunity for hospitals, physicians and other health care providers to benefit from reducing complications and hospital readmissions.
The term “efficiency” is the process of being effective in providing products or services. Bundling payment would deliver prospect of increasing flexibility in allocating resources. To provide more efficient and effective health care delivery, an episode-based payment needs to be in place. The efficiency of bundle payment is to improve population health, boost the patient care experience, and reducing cost.
Reference List:
- J. Cromwell, D.A. Dayhoff, et al, “Medicare Participating Heart Bypass Demonstration: Final Report,” CMS, (1998).
- Casale A, Paulus RA, Selna MJ, Doll MC, Bothe AE Jr, McKinley KE, Berry SA, Davis DE, Gilfillan RJ, Hamory BH, Steele GD Jr, “’ProvenCareSM’: A Provider-Driven Pay for Performance Program for Acute Episodic Cardiac Surgical Care,” Annals of Surgery, October 2007.
- Kaiser Family Foundation. “What the Actuarial Values in the Affordable Care Act Mean.” April 2011. Available at: www.kff.org/healthreform/upload/8177.pdf.
- Hogan, C., “Medicare Beneficiaries Costs of Care In the Last Year of Life,” Health Affairs, Vol.20, No. 4, 2001.
- Phillips R & Bazemore, A (2010 May). “Primary Care and Why It Matters For U.S. Health System Reform.” Health Affairs, 29(5): 806-810. Retrieved from <http://content.healthaffairs.org/content/29/5/806.full?sid=10acb56b-85a4-4ba6-bf78 01e5b298b039>.
- The Lewin Group, “Increasing Use of the Capitated Model for Dual Eligibles: Cost Savings Estimates and Public Policy Opportunities,” November 2008. Available at <http://www.ahcahp.org/LinkClick.aspx?fileticket=9vIE_ QLjQ4o%3D&tabid=66>.
- Miller M. “Most of Missouri Facing Shortage of Primary Care Doctors.” Southeast Missourian. July 21, 2011.
