Bundled Payment, Transparency, and Market Competition: What’s Under Wraps?

Bundled payment has been proposed as a payment reform with potential to advance improvements in the quality and efficiency of health care delivery. Bundling provides one comprehensive payment for multiple services involved with an episode or other defined package of patient care services. It allows providers to share in the financial risks and rewards of care delivery and includes incentives to reduce duplication of services and encourage efficient use of resources, eliminating “waste” in the system. Bundled payment can also be a powerful tool to advance competition and reduce costs in health care markets. The Congressional Budget Office estimates that bundling hospital and post-acute care for Medicare will save $18.6 billion by 2019. (1)

Bundling is not a new concept. Global capitation, which brings together all costs for a patient’s care, was a core payment method in early managed care programs. Diagnosis-related groups for hospital care, introduced in the 1980s as the prospective payment system under Medicare, are another established form of bundled payment. More recent approaches emphasized in the Affordable Care Act (ACA) legislation focus on far smaller units of service, by the episode or procedure. To date, experience with episode-based and procedure-specific payments has been limited, but there is hope that bundling demonstrations called out in the ACA will contribute to the evidence base.

So, what is bundled payment all about? What is inside the bundle, under wraps?

Defining the Bundle
Bundling pulls together services and resources to create units of care for a specific procedure or episode of care, and it aligns incentives for quality. Defining what should be bundled or included as a defined package of care is not always straightforward and requires some degree of consensus among providers, purchasers, and other stakeholders. Bundling works best for procedures that are relatively well defined, of similar duration, and use predictable types and amounts of resources, which enable a common payment to be established for specific bundles of care. Early experiences with bundling through Medicare demonstrations and in the private sector addressed knee replacement, cataract surgery, and coronary artery bypass surgery, all procedures that could be readily defined for episodes of common duration and conducted with predictable resource utilization and cost on patients at comparable acuity levels. Some bundling arrangements include pre- and post-discharge services in addition to provider services (e.g., hospital, outpatient, and physician services) during the procedure, while others are more tightly bounded by the acute care episode.

Bundled payment enables comparisons among service offerings and, coupled with price and quality transparency, fuels competition among providers. Quality improvement and care innovations are sensitive to incentives to reduce costs and improve margins, pressing for innovations that can be introduced within competitive, bundled pricing structures. Improvements in quality and value are more challenging to identify, but to the extent quality is also transparent it can further fuel market competition as consumers choose among providers.

Does Bundling Reduce Costs?
Bundled payment has the potential to reduce spending through incentives for providers to deliver care efficiently (e.g., reducing duplication of services, such as testing) by coordinating care across providers of the packaged episode. Gain sharing or other incentive arrangements can be used with bundled payment to reward providers for achieving cost and quality goals. For example, Medicare’s Acute Care Episode Demonstration, initiated in 2009, pays participants a flat fee to cover hospital and physician services for cardiac care and orthopedic care, and it allows sites to reward clinicians and other staff members who meet quality and efficiency goals.

Early demonstrations have shown that bundling can reduce costs, but the evidence is based on a few programs, mostly large integrated health systems and hospitals. Medicare’s Heart By-Pass Center demonstration, conducted with seven hospitals in the 1990s, is reported to have saved $42.3 million compared to expected spending, with 86 percent of savings derived from negotiated discount rates for patient services.(2) More recent studies in the private sector have also shown savings from bundled care. Casale’s study of Geisinger’s ProvenCare, a cardiology service program, compared bundled services for 117 patients in the intervention with those of 137 patients from a year prior to implementation of bundling and found that hospital costs dropped by 5 percent.(3)

Does Bundling Improve Quality?
Maybe, but it’s hard to tell. Bundling includes incentives for undertreatment, but this can be difficult to detect. Information technology that helps assess utilization and clinical care inputs from multiple providers and services, together with care delivery and quality standards, is needed to measure and maintain accountability for patient care outcomes.

Some episode-based programs have demonstrated positive influences on structure and process quality measures as well as being associated with decreased costs of care. Geisinger’s ProvenCare coronary bypass program shows striking results: a 10 percent reduction in readmissions, shorter average length of stay, and reduced hospital charges during the first year. More recent data show that, over the course of 18 months, the program achieved a 44 percent drop in readmissions. (4)

These changes were coupled with pay-for-performance incentives tied to 40 best practices based on American Heart Association and American College of Cardiology guidelines. Only 59 percent of patients received all 40 best practices at the start of the program, but 6 months into the program, 100 percent of patients received all best practices.(5) Other studies of coronary bypass and orthopedic surgery have also shown quality improvements (e.g., a decline in potentially avoidable complications and reoperations).(6)

Transparency, Choice, and Market Competition
Transparency of price and quality—to ensure all providers and patients have access to what they can expect with a bundled payment, what the payment includes and excludes, and who the participants are—is essential to leveraging the power of bundled payment to advance value in health care. Bundling provides incentives for providers to differentiate product and price and enables purchasers and payers to compare and contrast offerings. Winners are providers who can define and deliver on better health outcome metrics.

Employer experience with value-based purchasing provides lessons to help leverage bundled payment through price and quality transparency in health care markets. Safeway combined transparency with benefit caps, incentivizing employees to select lower priced, quality providers, and realized important savings on procedure costs. Noting that prices for colonoscopies range from $900 to more than $8,000, Safeway publishes provider prices and allows employees to choose—but pays only up to $1,500 per procedure, the amount that data indicate is needed for a quality procedure. Employees can choose their provider, but if procedure costs are above the $1,500 limit they must pay out of pocket. (7)

Will It Work in All Markets?
No. Health care cost savings and quality improvement depend on the design and level of payment and incentives, the structure and dynamics of local market competition, and the services that make up the bundle. Importantly, payment and incentives must be significant enough to encourage meaningful change (e.g., bundled services that combine lower cost quality services relative to other market offerings).

Markets with one or few dominant purchasers and many providers offering services have the greatest potential for reform through transparency and bundling. These markets will be best positioned to yield choice as these customers exercise their purchasing power and providers respond to customer demand. Markets with one or more dominant providers face challenges of more limited choice; as we’ve learned in studies of hospital consolidation in health care markets, prices increase.(8) If market dominant players bundle expensive services at high rates, high market prices and costs can be assured.

So, What’s Under Wraps?
Getting to the value proposition involves several as yet unresolved issues as we expand application of bundling approaches.

As bundling is applied to new, less well defined conditions it will become more complex to implement and administer. Resource use and duration for conditions that require an extended continuum of care from multiple provider settings, especially chronic conditions that require in-home and community-based care will be especially difficult to define and bundle. Dividing payment and profits with new or multiple providers is also challenging, with no clear decision rules.

Risk adjustment that considers severity of illness in different patient populations is an inexact science about which we have little experience, especially in the bundled payment arena. The BCBSMA Alternative Quality Contract (AQC) is attracting attention as a possible model. Risk adjustment in the AQC takes into account patient demographics and co-morbidities, geographic location, and provider specialty in developing an evidence-based case rate that is unique to each patient.(9) The adjustment reduces the incentive for providers to avoid patients with more complex conditions. The strength of this approach for cost control requires careful study.

Bundling appears to work best within one organization. In large integrated systems bundling can save money because profits are distributed within one entity. Dividing payments and profits with two or more entities becomes more complicated and requires sophisticated information technology to pull together information on care and treatment costs and quality across providers and services in the bundle. It also requires that roles and rules be negotiated within and across care delivery teams. Some physicians have expressed concern that bundled payment may give hospitals too much control over physician rates and that physicians may not get paid their fair share. Both primary care physicians and specialists have expressed concern about whether and to what extent their services will be included in the care bundle.

Measuring quality within the bundle is another area where the evidence and experience are limited to a few experiments in the field. The Minnesota Department of Health’s “baskets of care” concept defines a scope and set of components for care for a specific condition, procedure, or episode, and includes quality measures for each of eight baskets: asthma (children), diabetes, pre-diabetes, lower back pain, obstetric care, preventive care (adults), preventive care (children), and total knee replacement. Uniform baskets of care enable consumers to compare care offered by various providers and are based on evidence-informed standards of practice. The BCBSMA’s AQC, which combines global payment and quality bonuses, includes performance-based incentives for inpatient and ambulatory care quality and outcome measures, and it allows AQC organizations to earn up to an additional 10 percent of their global budget.(10) These global payment and quality incentives have been able to improve margins and reduce spending below rates of inflation. (11)

So, what’s inside the bundle? Is bundled payment the health payment reform to reduce costs and improve quality?

With only limited evidence, the verdict is still out. There is a lot we don’t know about how bundling works with different conditions, involving multiple providers and systems, and diverse populations with different care needs. But as a tool for advancing value-based health care, its power to reduce health care costs and improve quality isn’t just about bundling services by episode or procedure over time; it is about transparency and choice that enable consumer decision making. Transparency and choice can move markets—and they are long overdue.


1.     U.S. Congressional Budget Office. (2008, December). Budget options, volume 1, health care (Publication No. 3185). Retrieved from http://www.cbo.gov/ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf

2.     American Hospital Association Committee on Research. (2010, May). Bundled payment: AHA research synthesis report. Retrieved from http://www.hret.org/bundled/resources/BundledPayment.pdf

3.   Casale, A., Paulus, R. A., Selna, M. J., Doll, M. C., Bothe Jr., A. E., McKinley, K. E.,…Steele Jr., G. D. (2007, October). ProvenCareSM: A provider-driven pay-for-performance program for acute episodic cardiac surgical care. Annals of Surgery, 246(4), 613–621

4.     Mechanic, R. E., & Altman, S. H. (2009, January 27). Payment reform options: Episode payment is a good place to start. Health Affairs. Advance online publication. doi: 10.1377/hlthaff.28.2.w262

5.     Casale, A., Paulus, R. A., Selna, M. J., Doll, M. C., Bothe Jr., A. E., McKinley, K. E.,…Steele Jr., G. D. (2007, October). ProvenCareSM: A provider-driven pay-for-performance program for acute episodic cardiac surgical care. Annals of Surgery, 246(4), 613–621

6.     Cromwell, J., Dayhoff, D. A., McCall, N. T., Subramanian, S., Freitas, R. C., & Hart, R. J. (1998, July 24). Medicare participating heart bypass center demonstration: Final report. Health Economics Research, Inc. Retrieved from http://www.cms.gov/reports/reports/itemdetail.asp?itemid=CMS060191

7.     Safeway senior vice president Ken Shachmut talks about holding health care costs steady, for four straight years, do-it-yourself health reform, and $8,000 colonoscopies. (2009, November 3). The Commonwealth Fund–Purchasing High Performance. Retrieved from http://www.commonwealthfund.org/Content/Newsletters/Purchasing-High-Performance/2009/November-3-2009/Interview/Safeway-Senior-Vice-President-Ken-Shachmut-Talks-about-Holding-Health-Care-Costs-Steady.aspx

8.     Berenson, R. A., Ginsburg, P. B., & Kemper, N. (2010, April). Unchecked provider clout in California foreshadows challenges to health reform. Health Affairs, 29(4), 699–705. Retrieved from http://content.healthaffairs.org/content/29/4/699.abstract

9.     Division of Health Care Finance and Policy, Commonwealth of Massachusetts. (2011, February). DHCFP report on bundled payments, volume 1 (Report No. 11-056-HFC-01). Retrieved from http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/11/bundled_payments_report_02-2011.pdf

10.   Division of Health Care Finance and Policy, Commonwealth of Massachusetts. (2011, February). DHCFP report on bundled payments, volume 1 (Report No. 11-056-HFC-01). Retrieved from http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/11/bundled_payments_report_02-2011.pdf

11. Mechanic, R. E., & Altman, S. H. (2009, January 27). Payment reform options: Episode payment is a good place to start. Health Affairs. Advance online publication. doi: 10.1377/hlthaff.28.2.w262


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