Crushing Healthcare Costs: Is Capitation or Bundled Payment the Solution to Eliminating Health Care Waste?

A Side-by-side Comparison: Capitation vs. Bundled Payment

A Case for a Population-based Payment (Capitation model):  Inefficiency is an undeniable feature of modern American health care.  Medical professionals recognize that within the current fee-for-service system there are powerful incentives for performing unnecessary services. It is estimated that up to one third of the $3 trillion national expenditure on health care is for unnecessary or suboptimal treatments.  A new study by Brent C. James, MD and Gregory Poulsen entitled “The Case for Capitation” suggests that the most effective strategy for curtailing this waste is to adopt a population-based (or capitation) payment model.  Within the capitation system, providers would obtain a fixed fee per patient to cover all treatments provided within a defined period of time. To ensure high quality of care, these fees would be adjusted for the patient’s needs and outcomes.  James and Poulsen identify three primary inefficiencies in health care. The first only comprises about five percent of all health care waste but consists of misuse of resources, including misapplication of personnel, overpriced supplies, and logistical inefficiency.  The second source of waste involves unnecessary services that providers often perform without a compelling medical reason.  The final form of waste includes services that could be substituted with a less expensive alternative, like unrequired end-of-life care, elective surgeries, or hospitalization in place of outpatient treatment.  All three forms of waste are rampant in modern health care because providers have a limited financial stake in eliminating it and, in many cases, payers may penalize organizations for implementing more efficient treatment delivery systems. Without an incentive to optimize delivery, medical organizations are often reluctant to revamp their operations. According to the authors, a population-based payment model would provide that much needed incentive. Within this system, providers would limit the services offered only to those that would likely improve the outcome.  Because extraneous costs would be absorbed by the provider rather than transferred to the payer, there would be a strong impetus to maximize efficiency. There may be some concern that providers may withhold some services out of financial concern, but this could be avoided by implementing quality standards.  At worst, care quality should be at least as high as that within the fee-for-service system. Furthermore, there are a number of systemic controls already in place which buttress high quality standards.   Some critics of the capitation model may point to the failure of health maintenance organizations at the end of the last century. James and Poulsen contend that HMOs were intrinsically flawed because the insurance companies that operated them had opposing interests from patients.  Because insurers were trying to maintain profits, they often interfered in care delivery. Within a population-based payment system, insurers would not manage these organizations.  The provider itself would determine what services are likely to produce the most optimal outcome.  Because of the quality metrics, physicians would desire the best possible outcome while eliminating services which could compromise financial rewards.  The rewards for higher care quality and limited waste would also fuel innovation, an essential component for developing more efficient care systems. In the current fee-for-service system, these profits are often diverted to insurers, sapping resources which could be reinvested into provider organizations. According to James and Poulsen, the 5 to 9 percent return for providers who optimize operation in a FFS system could expect 50 to 100 percent returns in a PBP system.  Patients would also benefit from PBP.  Not only would patients see treatment improvements as a pay for value system is implemented, but they are likely to see cost reductions as providers pass on some savings in an effort to attract market share.  It may take some time before the health care industry fully adopts a population-based payment system, but James and Poulsen are fully convinced that once enough organizations recognize the benefits, there will be a sea of change across the sector.

A Case for a Bundled Payment System: It is apparent to almost all of the medical community that one of the primary reasons that health care is so expensive is the current fee-for-service payment system.  This less than optimal reimbursement model encourages waste, unnecessary treatments and diminished patient outcomes.  This is why major payers like Medicare are transitioning to value-based payment models.  A new report by Michael E. Porter and Robert S. Kaplan of Harvard Business School argues that American health care providers should adopt a bundled payment system which would improve patient outcomes while curtailing waste.  This payment system would offer a lump sum to treat a specific diagnosis, including co-morbidities and follow-up care. The payment amount would be adjusted for risk, enabling physicians to take on a wider range of cases.   The key benefit of a bundled payment model is that it would allow providers to eliminate inefficiency.  By concentrating teams of medical specialists that can focus on remediating a specific health condition, providers can not only improve efficiency and therapeutic outcomes but also lower operating costs. Porter and Kaplan suggest that cost savings for providers in bundled payments could reach 20 to 30 percent.  Bundled payments would also bolster competition among providers, a benefit not found in the capitation payment system. While capitation or population-based payments would discourage providers from partnering with external medical groups in an effort to keep costs low, the bundled system would facilitate such partnerships so that better outcomes could be achieved as well as greater market competitiveness. Capitation would fuel industry consolidation—in order to limit statistical risks and augment internal services—which would suppress market competition and drive prices up. On the other hand, bundled payment will free patients to choose providers based upon quality and cost. Not only will patients pay less than in a fee-for-service system, but they should obtain improved care as providers utilize a more specialized and integrated treatment approach that rewards better, more cost effective outcomes.  In “How to Pay for Health Care,” Porter and Kaplan cite numerous examples in which bundled payments have produced improved care quality and greater financial rewards.  From 1991 to 1996, the Centers for Medicare & Medicaid Services used a bundled payment system in their Heart Bypass Demonstration, which produced ten percent cost savings or $42.3 million at the seven participating hospitals. There was also a diminished mortality rate and enhanced patient satisfaction among program participants. In Stockholm, Sweden, the government implemented a bundled payment program for hip and knee replacements. The program produced a 17 percent reduction in costs and a 33 percent reduction in complications.  Finally, UCLA has had a bundled payment system for its kidney transplant program for more than two decades.  The integrated practice unit or IPU that is composed of a variety of specialists, has produced outstanding results for one of the nation’s most respected kidney transplant programs. Within this framework, specialists negotiate a fee based on impact and risk, while deriving rewards based on success. A bundled payment system would better allocate resources than our present, highly fragmented care delivery system.  It would also incent providers to offer optimal care throughout the treatment process.  These powerful forces would ultimately help drive down costs in an organic and sustainable way.

Article written by Robert Moghim, M.D., CEO Moghim Medical Consulting, Inc.

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