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Bundling Bedlam


Even if you receive your salary as an employee of your hospital or hospitalist group, you should keep a close eye on discussions taking place in Washington about reshaping the way hospital care is paid for. It seems that every 10 to 20 years, a seismic tremor starts on Capitol Hill and fundamentally shakes up the way healthcare is funded. It starts with Medicare, then quickly is adopted by private insurers; it not only changes the distribution of dollars, but the new incentives also drive the way medicine is practiced.

In the 1960s, change began with President Johnson and the development of Medicare and Medicaid. It was the first time specific populations—seniors and the poor—were “entitled” to healthcare coverage. In essence, Johnson created the largest “insurance company” in the country, and it became the tail that wagged the dog.

Right now, hospitals receive the DRG payment and physicians bill for their own professional services. In the future, will all the money flow to the hospital? How will these dollars be distributed? Who determines who will be awarded performance bonuses?

In the 1970s, President Nixon pushed through support for HMOs, and capitation and managed care spread well beyond the Kaisers of the world. This system incentivized controlling costs, because the total amount was capped, while maintaining an acceptable level of quality. For the first time, doing more did not generate more money.

In the 1980s, diagnosis-related groups (DRGs) changed Medicare payments to hospitals from cost-plus billings to a bundled fee for an episode of care. This motivated hospitals to work with their physicians—sometimes driven by protocols and case managers—to efficiently manage resources and length of stay (LOS). Between capitation, case rates, and DRGs, hospitals have had to refashion themselves to be leaner and more efficient.

Today, with national thought leaders like John Wennberg and Elliot Fisher at Dartmouth and Brent James at Intermountain revealing the many variations in the way healthcare is practiced—and throwing around statistics like “40% of healthcare is wasteful”—it is no wonder that as President Obama and Congress look to add 47 million uninsured persons to the system and try to reduce variation and increase accountabilities, there is every indication that radical changes will be made to the payment system.

One of these newfangled approaches is the bundling of payment for an episode of care to include both the facility charges (e.g., hospital care) and the professional charges (e.g., physician care). Bundling can be a good thing or a worrisome approach, depending on where you sit in this dialogue and how bundling is actually implemented.

Background on Bundling

The motivation of the government—and, by extension, all insurers—is that efforts to control what they pay per unit for a visit, a procedure, or even an entire hospitalization has not curbed costs or led to a satisfactory level of performance. With respect to hospitalized patients, Obama has stated that he wants to eliminate waste by reducing unnecessary readmissions to the tune of $6.8 billion annually. Furthermore, Medicare officials want to look for strategies that either keep people out of the ED post-discharge or at least eliminate Medicare’s need to pay for this care, which they feel is unnecessary and avoidable.

By bundling payment for a specific admission (e.g., decompensated heart failure or pneumonia) and including the facility and professional-care fees, both during hospitalization and for a period of time (e.g., 30 days post-discharge) and providing incentives for best performance, the insurer (i.e., Medicare) can hand off responsibility to the hospitals and the doctors to figure it all out. There is nothing like the accountability of knowing “this is all you are going to get,” or “if you want more, you have to meet these standards,” to motivate professionals to reshape their system to improve their discharge process, engage the outpatient physicians, and do the job right the first time. This can play to HM’s strengths, and SHM already has started developing and implementing change in the discharge process through Project BOOST (Better Outcomes for Older Adults through Safe Transitions,

Potential Problems

One key concern is not knowing who—or what—will control the dollars once Medicare sets the bundled payment. Right now, hospitals receive the DRG payment and physicians bill for their own professional services. In the future, will all the money flow to the hospital? How will these dollars be distributed? Who determines who will be awarded performance bonuses?

In California and other states with significant managed-care populations and large medical groups, there is real-life experience with setting up efficient physician-hospital organizations (PHOs) to solve these issues. Some take the form of independent physician associations (IPAs), which represent the physicians in PHOs. There is no reason PHOs cannot be developed to administrate these bundled funds, and hospitalists, who are seeing an increasing number of hospitalized patients on medicine and surgery, should be key leaders in such PHO arrangements.

But HM is not a monolith in this discussion. The diversity in how HM groups are organized, their relationship with their hospitals, and how hospitalists or their groups receive funding can, and will, influence the group’s perspective on this issue. Hospitalist groups that are independent from their hospitals, or those that rely on referrals from primary-care physicians (PCPs) or the ED, might be justifiably concerned about all of “their” money having to flow through the hospital. Hospitalists who are employed by a hospital might be concerned that they will need to develop new metrics to justify their salaries and bonuses. HM groups that contract with the hospital might be concerned that a change in the flow of funding from Medicare to the hospital might make their contractual arrangements more difficult.

For those who battle with hospital administration over hospital support of their HM group, they might find bundling alleviates the need for the current use of Part A dollars to support hospitalists, because the new bundling of Part A (current payments for hospital facility charges) and Part B (current payment for physicians’ professional services) can allow for a more professional discussion, based on the value hospitalists bring. The need for subsidies or support could diminish or vanish.

Change Is Coming

No matter your perspective or viewpoint, one reality is coming into focus: This president and this Congress will make sweeping changes, and it appears from our conversations with Sen. Max Baucus (D-Mont.), chair of the powerful Senate Finance Committee (see “Medicine’s Change Agent,” May 2009, p. 18), that bundling and value-based purchasing will be part of healthcare reform.

With this in mind, SHM’s Public Policy Committee is actively engaged in trying to shape bundling in a way that fits emerging changes in the care of hospitalized patients. We want a system that works for the way healthcare will be practiced in the future, not a Band-Aid on the system of the past. This is very important stuff. Hospitalists will be affected by reform because so many of our patients are on Medicare and our compensation is generated by patient care in the hospital.

SHM has created an easy-to-use, Web-based system to send a message to members of Congress through a partnership with Capwiz. Visit to get started.

While the uncertainty of healthcare reform and, more specifically, payment reform is at times frightening, mainly because it is so sweeping and at this point so undefined, HM has been forged in the cauldron of change and ambiguity. Hospitalists are positioned as well as any health professionals to seize the opportunities that a new system will provide. And SHM will do its part to help shape the new reality and assist our members in creating successful strategies in this new environment. TH

Dr. Wellikson is CEO of SHM.

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