Leaders of provider organizations have good reason to be cynical toward the “next big thing” in health care. Most transformational trends fail to materialize as predicted by the pundits, and the occasional changes that do occur take much longer than expected. However, as a health futurist and medical economist, I am among those who foresee a significant shift from fee-for-service reimbursement to bundled payments over the next five years. The trend is perceptible and accelerating. Providers should get serious about taking action, sooner rather than later, to promote the growth of bundled payment.

Powerful forces

Still in its early stages, the shift toward bundled payment is not yet a universal phenomenon. The counterbalancing decline of fee-for-service reimbursement is occurring in different ways at different paces in different areas. How the transformation ultimately occurs in any given marketplace can still be influenced in a good way by executives who embrace it as an opportunity to improve performance. Conversely, efforts to preserve fee-for-service reimbursement for the long run are counterproductive because the pressures to replace it are powerful. 

Indeed, the need to move away from volume-based payment is a rare area of general agreement between Republicans and Democrats in an era of relatively low economic growth. Regardless of how much Obamacare is weakened as a result of upcoming elections and Supreme Court decisions, it’s almost impossible for me to imagine any change in Congress that would increase appropriations for medical expenditures in the foreseeable future. Bundled payment is not the only way Congress can constrain spending on health care, but it is the one most likely to survive battles over budgets and regulations. (We must not forget that the House and Senate control the purse strings; presidential candidates’ health proposals are just proposals.)

Bipartisan pressure to create an alternative to fee-for-service reimbursement is based on a consensus that our traditional payment mechanism is a major cause of unnecessary spending. The back-office structure that supports itemized billing costs hundreds of billions of dollars that could instead be spent on patient care, and an incredible amount of time is wasted because the process is so illogical and error-prone.

In addition, everyone knows that charged fees do not reflect actual costs. Given potential public policy responses to this glaring discrepancy, provider initiatives to bundle payments are relatively attractive as a defensive strategy. A government-driven alternative, such as tying reimbursement to costs as defined by regulators, would be a bureaucratic nightmare by comparison.  

The movement away from traditional reimbursement is also gaining strength because fee-for-service’s economic incentives work to increase volume at a time when cost-effectiveness studies consistently demonstrate that we would be healthier with less care. Health systems need to align with the medical specialty associations that are working to eliminate medically unnecessary and unproductive care. Joining this movement will become essential to financial survival as consumers increasingly refuse to pay for services that do not make them healthier. (We are not far from the day when delivering services known to be ineffective, even if delivered safely, will be considered malpractice.)

However, before taking necessary steps away from fee-for-service, we need to ask a fundamental question: what is bundled payment? There is no clear and consistent answer. Writers and speakers on the topic define it in many different ways. To add to the confusion, bundled payment is commonly used as a synonym for two worthy but different concepts, population health and value-based reimbursement. To update a comment made in the 1990s when managed care was touted as the next big thing, “If you’ve seen one bundled payment system, you’ve seen one bundled payment system.”

Tailored solutions

Leaders of hospitals and health networks should not be discouraged by the lack of a consistent definition of bundled payment. I actually find the variability encouraging because I strongly oppose one-size-fits-all approaches to solving the problems of our medical marketplace. In my opinion, an incredible amount of time and effort is wasted on reforms and regulations that force all providers to adhere to one set of national standards. Development of different approaches reflecting significant differences in local marketplaces would be a sign of success, not failure.

If there were only one right way to organize the flow of resources through our health care delivery system, all our country’s leading health systems (Mayo, Kaiser, Geisinger, Intermountain, Baylor, Virginia Mason, etc.) would be identical — but they are not. Remarkable differences in their organization, leadership and operations prove there are several ways to provide world-class health care in the United States. I am consequently energized by the opportunity for innovative health systems to customize bundled payment to the unique characteristics of their own circumstances.

The corresponding challenge for health care’s leaders is to embrace a common goal — overcoming the failures of fee-for-service reimbursement — and then to develop their own payment mechanisms that generate enough income to deliver care efficiently (i.e., without waste), effectively (i.e., without variation from expectations) and accountably (i.e. supported by published performance metrics). These bundled payment mechanisms will all incorporate fixed payments for managing chronic diseases and caring for episodes of acute illness or injury, but they will be implemented in different ways. Successful efforts will take several years to evolve, and they will require multistakeholder partnerships between purchasers, payers and patients. (See my March 31, 2015 H&HN Daily feature, “Why Vertical Integration Partnerships Matter.”)

This is not a matter of life or death for any individual health system; it’s more important than that. For reasons elaborated in Paradox and Imperatives in Health Care: Redirecting Reform for Efficiency and Effectiveness, revised edition, providers and their business partners are under intense pressure to justify the 17 percent of gross domestic product currently spent on health care. The medical sector peaked at a bit above 18 percent of GDP in 2012 and is most likely to continue declining even if nothing is done to eliminate its abundant waste — universally estimated to be at least one-third of all spending on health care.

Several of my esteemed colleagues who write in this space make a powerful argument that we could operate on 12 percent of GDP simply by getting rid of the waste. Although I cannot disagree with their analysis, I advocate a different approach to solving the problem. I’d much rather give providers an opportunity to show how well they can perform if given authority and responsibility to produce the healthiest country that 17 percent of GDP can buy. The alternative toward which we are heading, allowing health care to fall to 12 percent of GDP, is just “the same mess for less.” Let’s work to avoid it while we still can. Leading the shift from fee-for-service to bundled payment would be a significant step in the better direction.        

Jeffrey C. Bauer, Ph.D., is an independent health futurist and medical economist based in Chicago. He also is a member of Health Forum's Speakers Express.