How Bundled Healthcare Works?

Patients in the United States face varying degree of costs for the same healthcare service. For instance, the cost of a cardiac operation could vary in the same city by as much as 40% depending on the service provider that has been selected. This has led the industry players to look for models which are more cost-effective and where service providers can be held accountable. This is how bundled healthcare payment programs have come into existence. It is only a new way of reimbursing service providers. However, it seems to be revolutionary. Companies like Lowe’s, Wal-Mart and Boeing have already adopted the bundled payment model and other companies are also catching on quickly. In this article, we will have a closer look at what bundled payments are and what are the pros and cons of adopting this model.

What Are Bundled Payments?

Under the traditional model, the insurer had to reimburse several service providers. For instance, for every claim, the insurer had to pay the doctors, the pathology lab, and the hospital and so on. However, under the bundled payments model, the insurance company will make a fixed payment to a single party. For instance, if the patient wants to get a knee replacement done, the insurer will pay a fixed amount to one party. That party will then be responsible for arranging other stakeholders like doctors, nurses etc. The insurer will pay a fixed amount (let’s say $100 per surgery). If the third party is able to ensure that the patient is provided all the services within $80, they get to keep the balance $20. However, if there is an upward revision of costs to $130, then they have to shell out the $30 balance. The whole idea behind bundled payments is to create a culture of standardized healthcare. This means that within the same city or zip code, the cost of providing the same medical service should not vary widely.

Bundled payments are proving to be cost-effective. This is the reason that corporations are quickly adopting this model. Since this method is cost-effective, the premiums are also low which helps mega corporations save millions of dollars without reducing the standard of healthcare which they provide to their employees.

Challenges Faced By Bundled Payments

  • Bundled payments are based on a fixed fee for every episode of care. This fee needs to be determined based on empirical evidence. This simply means that a computer will use data regarding the costs of past knee replacement surgeries to determine what the costs of knee replacement surgery need to be in the future. However, such data is not available as of now. The creation of such databases will be a time consuming as well as expensive activity. Also, these databases will have to be maintained. This will lead to added costs. Hence this is a major challenge facing the bundled payments model.
  • The quality of health care services is likely to suffer if the model is not corrected. At the present moment, bundled services reward doctors and companies which can discharge the patient as soon as possible. This model has been developed to stop the chronic overuse of the healthcare system which has been incentivized by the current reimbursement model. The bundled payments model rewards under use of medical facilities. This is likely to encourage doctors to skip diagnostics as well as necessary procedures to keep the costs low. The quality of healthcare services provided may drastically decline causing a corresponding decline in the quality of life experienced by patients. Although it is important to lower the cost of providing healthcare, the well-being of patients should not be jeopardized in the process.
  • The bundled payments model makes it difficult for service providers to concentrate on the sickest of patients. These patients are complex cases which need more inputs and attention. However, the reimbursement amount received will be the same as any other patient. Hospitals and service providers would therefore not want to treat such patients. The outcome could be disastrous as the provision of healthcare to the sickest of patients could be hampered.
  • Lastly, there are many factors which are beyond the control of the doctors. For instance, doctors cannot ensure that the patient adheres to their prescription and takes all medicines on time. Also, doctors cannot ensure that the patient follows a healthy lifestyle. Also, in many times, patients contract communicable diseases from hospitals and doctors cannot really be held responsible for the same. Such behaviors by the patient would lead to an increase in healthcare costs for the service providers. However, the revenue would not increase. The end result will be that doctors will be penalized for no fault of theirs!

To sum it up, bundled payments model is still a promising idea. However, a lot of work still needs to be done. For instance, many drugs and services tend to be expensive or variable. They must be categorically excluded from the contracts to ensure economic viability. Also, the system needs to adapt to constant feedback. Advances in medical technology create the possibility of providing better services even more cheaply. Insurance firms will need to be on top of their data to ensure that they detect such patterns early and adjust their payouts accordingly.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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