Medicare's Move to Bundled Payments

Nov 17, 2011, 4:20 PM, Posted by

By Gail R. Wilensky, Senior Fellow, Project HOPE


Medicare has been moving away from reimbursing providers using fee for service payments and toward the use of bundled payments since the introduction of DRGs in 1983. The initial impetus for the change in reimbursement was the recognition that reimbursing hospitals on the basis of number of days spent in the hospital encouraged the use of additional days during a stay, especially since reimbursements had been based on the average cost per day even though most hospital stays are “front-loaded” in terms of their costs—with early days being much more expensive than last days in a stay.

Since 1983, the use of bundled payments by Medicare has been extended to outpatient hospital visits, home care and to a limited extent, to nursing home reimbursement. The major exception has been the way physician services are paid which has remained based on the use of a disaggregated fee for service schedule where physicians bill Medicare on the basis of 8,000 billing codes. Due to concerns about uncontrolled spending with a disaggregated fee schedule, it was combined with a spending limit that attempts to regulate fees per unit of service based on aggregate spending on physician services. The continued use of this reimbursement system has caused enormous frustration among physicians while doing little to slow the actual rate of growth of spending on physician services since the spending limit has been ignored every year it was breached except for 2002. Creating the appropriate bundle of payments to use for physician services has apparently not been possible, although it is not obvious that much effort has been directed to developing an alternative system of payments for physicians.

The Future for Bundled Payments

While the use of bundled payments for hospitals, nursing homes, and home care improved the incentives that had existed before their use, the way they were constructed led to some obvious problems. Bundled payments encourage efficiency within the bundle that the payment covers but not for services outside the bundle. As a result, the use of DRGs reduced the number of days for a hospital stay. However, concerns were quickly raised that:

  • Patients were being discharged too soon - increasing the costs of post acute care;
  • Patients were readmitted more frequently than necessary;
  • Use of outpatient or ambulatory care was increased; and
  • Payments did not differentiate for stays or episodes of different quality.

These concerns have led to “refinements” in how the bundles are constructed or what else is measured in conjunction with the bundle, including:

  • Some “unnecessary readmissions” to hospitals, believed to reflect poor quality of care, will no longer be reimbursed by Medicare.
  • Pilot projects that pay a single payment to include inpatient hospital care and post acute care are planned for the future.
  • Value-based purchasing strategies that reward hospitals and nursing homes that provide higher quality are part of the Affordable Care Act.

What is likely to result from these changes? It is clear that institutions and clinicians respond to both intended and unintended financial incentives. Although financial incentives are important and impact behavior, institutions and individuals do respond to other incentives. Just as DRGs reduced the number of days for hospital stays, paying more for improved quality will increase the focus on the quality measures used to determine increased payment.

The challenge is to make sure that the intended and unintended incentives cover most of the anticipated behavior changes. It was no surprise that soon after DRGs were introduced, hospitals were accused of discharging patients “quicker...but sicker.” Although, the incentive was to discharge patients sooner, most hospitals probably did not discharge patients “too soon.” However, without quality measures, it was hardly a surprise that some discharges might have been sooner than would have been desired. It will be several years before current or soon to be implemented changes will be evaluated for their effects on costs and quality.

The Expected Effect on Nursing

The move to more inclusive bundles, particularly those that differentiate according to the quality of care provided, should increase the role of nursing in providing care to patients. Since nurses have not traditionally been able to bill Medicare independently, except under limited circumstances, the value they bring is easier to capture the larger the payment unit. In capitated systems, such as HMOs, where a single payment covers all services provided over the course of the year, the incentive is greatest to use the mix of health care personnel that can provide the health services needed at the lowest cost.

Not surprisingly, the role of nurses has tended to be greater at organizations such as Kaiser and Geisinger, as well as in the military relative to the care provided by more traditionally reimbursed physician groups. As the scope of services that is included in the bundled payment expand, some of the same incentives that have affected decision-making in the capitated systems will begin to dominate decision-making elsewhere. The repeated studies that have shown high quality associated with primary care services provided by nurse practitioners should only increase their attractiveness whenever payments are differentiated for quality.

Successfully challenging scope of practice laws will make it easier to capture the efficiency that nursing can provide, especially in rural or inner city areas but the use of more bundled payments will help as well.

This commentary originally appeared on the RWJF Human Capital Blog. The views and opinions expressed here are those of the authors.