Medicare Bundled Payment Challenges

An editorial in the LA Times has received some backlash from physicians for expressing support for reforming Medicare's payment system from fee-for-service to a bundled payment.

One Physician from Santa Clarita perfectly sums up the concerns:

Putting financial burdens on doctors for better results ignores social factors, including personal compliance.

Some skin in the game, however, is exactly what we need to demand of physicians.

Under its current structure, Medicare - as with private insurance - reimburses providers based on the complexity (determined somewhat arbitrarily through the Resource Based Relative Value Scale) and volume of their procedures. Predictably, as with any volume-based payment system, this encourages overuse of the system and contributes to fraud. While private insurance, not reliant on taxpayer money, has significant incentive to reduce waste and fraud resulting in higher overhead, Medicare instead has an incentive to keep such "overhead" costs low, resulting in unrealistically low administrative expenses (if Medicare were to combat fraud at the same level as private insurance, their administrative expenses would likely be similar). These dynamics mean that fee-for-service reimbursements may work with private insurance (which tries to reduce waste and fraud) but may not be appropriate for a government program with less incentive to do so.

Under a bundled payment structure, care providers would receive a sum of money to provide for the healthcare needs of their patients while still ensuring quality. By tying providers' income to the health of their patients rather than the volume of care provided, two problems are addressed: first, the perverse incentive to needlessly increase the volume of high paid specialist services is minimized; but secondly, it eliminates the need to constantly return to bickering over Medicare's Sustainable Growth Rate, since growth would be more manageable under pre-determined budgets.   

Indeed, the original LA Times article cites a study showing a 10 percent reduction in costs under a bundled payment approach, with the same level of quality of care.

But it's important to also realize the difficulties that physicians would face if Medicare adopted bundled payments. The same physician concerned about taking on financial burdens also worries about tort reform:

There is also a chance that should I neglect to order a test, I'll get sued by an avaricious malpractice lawyer.

For real Medicare reform to take place, physicians have to be held accountable not only for a patient's health, but also for unnecessary costs incurred by the publicly-funded system. At the same time, other healthcare reforms will be necessary to align the rest of the system with the new reimbursement schemes, and this will no doubt include tort reform. Bundled payments offer a good start to help cut the overuse of Medicare, while ensuring that beneficiaries still receive the same quality of care. 

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