The 3rd pillar of the value agenda: BUNDLED PAYMENTS — Move to Bundled Payments for Care Cycles

Credit: Healthcare ValueHub

Harvard Business Review
Michael Porter and Thomas Lee
October 2013

This is an excerpt of the paper: “The Strategy That Will Fix Health Care“, published in 2013, focused on the topic above.

The Value Agenda Detailed 

  1. IPUs — Organize into Integrated Practice Units (IPUs)
  2. OUTCOMES & COSTS — Measure Outcomes and Costs for Every Patient
  3. BUNDLED PAYMENTS — Move to Bundled Payments for Care Cycles
  4. INTEGRATED CARE — -Integrate Care Delivery Systems
  5. GEOGRAPHY — Expand Geographic Reach
  6. IT PLATFORM — Build an Enabling Information Technology Platform

3: Move to Bundled Payments for Care Cycles

Neither of the dominant payment models in health care-global capitation and fee-for-service-directly rewards improving the value of care. Global capitation, a single payment to cover all of a patient’s needs, rewards providers for spending less but not specifically for improving outcomes or value. It also decouples payment from what providers can directly control. Fee-for-service couples payment to something providers can control-how many of their services, such as MRI scans, they provide-but not to the overall cost or the outcomes. Providers are rewarded for increasing volume, but that does not necessarily increase value.

The payment approach best aligned with value is a bundled payment that covers the full care cycle for acute medical conditions, the overall care for chronic conditions for a defined period (usually a year), or primary and preventive care for a defined patient population (healthy children, for instance). Well-designed bundled payments directly encourage teamwork and high-value care. Payment is tied to overall care for a patient with a particular medical condition, aligning payment with what the team can control. Providers benefit from improving efficiency while maintaining or improving outcomes.

Sound bundled payment models should include: severity adjustments or eligibility only for qualifying patients; care guarantees that hold the provider responsible for avoidable complications, such as infections after surgery; stop-loss provisions that mitigate the risk of unusually high-cost events; and mandatory outcomes reporting.

Governments, insurers, and health systems in multiple countries are moving to adopt bundled payment approaches. For example, the Stockholm County Council initiated such a program in 2009 for all total hip and knee replacements for relatively healthy patients. The result was lower costs, higher patient satisfaction, and improvement in some outcomes. In Germany, bundled payments for hospital inpatient care-combining all physician fees and other costs, unlike payment models in the U.S.-have helped keep the average payment for a hospitalization below $5,000 (compared with more than $19,000 in the U.S., even though hospital stays are, on average, 50% longer in Germany). Among the features of the German system are care guarantees under which the hospital bears responsibility for the cost of rehospitalization related to the original care.

In the U.S., bundled payments have become the norm for organ transplant care. Here, mandatory outcomes reporting has combined with bundles to reinforce team care, speed diffusion of innovation, and rapidly improve outcomes. Providers that adopted bundle approaches early benefitted. UCLA’s kidney transplant program, for example, has grown dramatically since pioneering a bundled price arrangement with Kaiser Permanente, in 1986, and offering the payment approach to all its payors shortly thereafter. Its outcomes are among the best nationally, and UCLA’s market share in organ transplantation has expanded substantially.

Employers are also embracing bundled payments. This year, Walmart introduced a program in which it encourages employees who need cardiac, spine, and selected other surgery to obtain care at one of just six providers nationally, all of which have high volume and track records of excellent outcomes: the Cleveland Clinic, Geisinger, the Mayo Clinic, Mercy Hospital (in Springfield, Missouri), Scott & White, and Virginia Mason. The hospitals are reimbursed for the care with a single bundled payment that includes all physician and hospital costs associated with both inpatient and outpatient pre- and post-operative care. Employees bear no out-of-pocket costs for their care-travel, lodging, and meals for the patient and a caregiver are provided-as long as the surgery is performed at one of the centers of excellence. The program is in its infancy, but expectations are that Walmart and other large employers will expand such programs to improve value for their employees, and will step up the incentives for employees to use them. Sophisticated employers have learned that they must move beyond cost containment and health promotion measures, such as co-pays and on-site health and wellness facilities, and become a greater force in rewarding high-value providers with more patients.

As bundled payment models proliferate, the way in which care is delivered will be transformed. Consider how providers participating in Walmart’s program are changing the way they provide care. As clinical leaders map the processes involved in caring for patients who live outside their immediate area, they are learning how to better coordinate care with all of patients’ local physicians. They’re also questioning existing practices. For example, many hospitals routinely have patients return to see the cardiac surgeon six to eight weeks after surgery, but out-of-town visits seem difficult to justify for patients with no obvious complications. In deciding to drop those visits, clinicians realized that maybe local patients do not need routine postoperative visits either.

Providers remain nervous about bundled payments, citing concerns that patient heterogeneity might not be fully reflected in reimbursements, and that the lack of accurate cost data at the condition level could create financial exposure. Those concerns are legitimate, but they are present in any reimbursement model. We believe that concerns will fall away over time, as sophistication grows and the evidence mounts that embracing payments aligned with delivering value is in providers’ economic interest. Providers will adopt bundles as a tool to grow volume and improve value.


About the authors

Michael E. Porter, is the Bishop Lawrence University Professor at Harvard University. He is based at Harvard Business School.

Thomas H. Lee, is the chief medical officer at Press Ganey and the former network president of Partners HealthCare

A version of this article appeared in the October 2013 issue of Harvard Business Review.

Originally published at on October 1, 2013.

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