Payment Bundling: Like It or Not, It’s Coming

October 1, 2009

Hospital-doctor bundling schemes are a near-certainty in any healthcare reform. Will physicians get the short end of the stick?


You may not have heard much about payment bundling yet, but it could determine how Medicare will reimburse you in the future. One proposal would give hospitals a single payment for inpatient and post-acute care, and some mechanism for paying private-office doctors for patient management, rather than for individual services, seems inevitable in any health reform package.

“The real savings aren’t going to be in a bundled payment rate between a hospital and a nursing home,” says Michael Bryant, CEO of the Methodist Medical Center of Illinois in Peoria, Ill. “The real savings, ultimately, are going to be in episodes of care, and that involves physicians.”

Some influential people in Washington agree, including President Obama. Speaking at the AMA Convention in June, he said, “We need to bundle payments so you aren’t paid for every single treatment you offer a patient with a chronic condition like diabetes, but instead are paid for how you treat the overall disease. We need to create incentives for physicians to team up - because we know that when that happens, it results in a healthier patient.”

The Medicare Payment Advisory Commission (MedPAC), which advises Congress, has been advocating bundling for years. And if the President has his way, MedPAC will get the authority to make decisions about Medicare reimbursement with only minimal oversight from Congress.

Bundling comes in several flavors

Combined payments for hospitals and post-acute care facilities could include physicians, according to Bruce Hamory, MD, chief medical officer emeritus of the Geisinger Health System, based in Danville, Pa. In this scenario, if a patient is readmitted within 30 days after discharge, the hospital won’t be paid any more for treating that patient. “That will lead to changes in hospital practice and a need for better handoffs and better defined care in the community,” he argues.

Another form of bundling would encompass hospital and physician payments for inpatient procedures; it might also cover all hospital and doctor costs for, say, 90 days after the procedure. In that scenario, the hospital would probably receive an expanded DRG (or “diagnosis-related group”) payment and distribute part of the money to the physicians involved.

There has also been discussion of bundling for longer-term “episodes of care” which might consist of all treatments for a chronic disease such as diabetes or congestive heart failure over a period of six to 12 months. Most notably, a group of healthcare experts has formulated an approach called Prometheus Payments that would have physicians and hospitals negotiate episodes-of-care case rates with payers.

Another concept that might play a role in bundling is “gainsharing,” in which physicians share in savings that they help create. Gainsharing is often associated with efforts by hospitals to limit spending on supplies and medical devices. But it can also be based on savings that doctors achieve for payers, such as cost savings from a reduction in hospitalizations and emergency room visits. Geisinger, for example, is part of a five-year CMS demonstration project involving 10 large physician groups; the groups share in savings that exceed 2 percent of the projected costs for treating Medicare patients. Geisinger received nothing for the first two years of the demonstration, but got $1.9 million for the third year.

Gainsharing between hospitals and doctors has been declared a violation of the Civil Money Penalties Act. But the HHS Office of the Inspector General has issued a dozen opinions allowing it under certain circumstances. Similarly, while it’s technically illegal to commingle Part A and Part B Medicare funds, Congress could allow this kind of gainsharing if it helps control Medicare costs.

Physicians distrust hospitals

A new CMS payment bundling demonstration project is underway now. The Acute Care Episode (ACE) demonstration, which involves health systems in Texas, Oklahoma, New Mexico, and Colorado, bundles Part A and Part B payments during an inpatient stay for 28 cardiac and nine orthopedic surgical services and procedures. The purpose is to find out whether this approach improves the quality of care, but the project is also aimed at improving efficiency. Physicians and hospitals can share in any savings that they produce for Medicare.

Hamory and others predict that physicians will fight hard against procedural bundling. The big problem, they say, is that physicians do not trust hospitals to distribute the money fairly. Moreover, hospitals and private-practice specialists are battling over outpatient business. If Medicare did implement procedural bundling, says Michael Brown, an Indianapolis-based healthcare consultant, physicians would do as much work as possible in their own ambulatory surgery centers, endoscopy suites, and imaging centers.

On the other hand, argues Gary Matthews, a consultant in Atlanta, it’s likely that physician-owned facilities “will be regulated out of existence” sooner or later, to save the government money. That’s less likely to happen with ancillary facilities and surgery centers that are jointly owned by doctors and hospitals. So, whether or not bundling emerges, doctors should consider joint-venturing with hospitals, he says.

Meanwhile, hospitals themselves are moving to align physician incentives with their own financial incentives. One way in which they’re doing that is to step up their hiring of both specialists and primary-care physicians.

How would reimbursement be affected?

Episode-of-care or post-acute-care bundling is much easier to do in a healthcare system that employs physicians, or in a large multispecialty group like the Geisinger Clinic. But Hamory believes it could be done effectively under a gainsharing arrangement in which physicians and hospitals work together to improve care and contain costs. Such an approach, he says, might even result in increased physician reimbursement.


Other observers are less optimistic that hospitals would treat physicians fairly. Matthews recalls that when some physician-hospital organizations (PHOs) took global capitation from HMOs in the 1990s, doctors tended to get the short end of the stick. Even if half of the PHO’s board consisted of doctors, one or two of them, like the chief of staff or the medical director, would be in the hospital’s orbit, he recalls.

It’s inevitable that primary-care physicians will be involved in nonprocedural bundling, even if they never go to the hospital. Brown thinks that primary-care doctors would fare the worst under bundling, because they’d get paid only after the hospitals and specialists had taken their cut.

In any case, William Jessee, MD, president of the Medical Group Management Association, believes that we’re heading toward a new era in which most physicians will work for large, integrated organizations that will receive some kind of bundled payments or even global budgets.

“The push is going to be towards more integration of physicians, hospitals, home health, and other services,” Jessee says. “And Medicare or a private insurer may put the provider at risk, instead of the insurer being at risk. It’s not explicit, but it’s implicit in a lot of the reform discussions that that’s the direction that Congress and the Obama administration would like to move in.”

Ken Terry is a New Jersey-based freelance writer and the author of the book “Rx for Health Care Reform.” He can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the October 2009 issue of Physicians Practice.