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VOLUME 46 | NUMBER 6 | DECEMBER 2011


Why Physicians Should Like Bundled Payment

Fee For Service payment has been the dominant form of reimbursement in America for decades. Yet increasingly it is viewed as a factor contributing to the ills of our system: high costs and sub optimal quality. Several reports have noted that prices for health care services in the US are often considerably higher than in other countries.(2009) Moreover, within the US there is wide variation in prices paid by different payers. For example, the article by Robinson in this issue carefully documents a wide gap (33%) in payments between Medicare and Commercial payers for cardiac valve replacement.(2011) For all its flaws, the Medicare program is able to obtain (impose) lower prices than private insurers.

The level of FFS prices is just one concern with the FFS system. Perhaps a more basic concern is that the unit of service, which is very detailed, is difficult to manage, creating substantial administrative costs related to coding and generating undesirable incentives. For example, the Medicare physician fee schedule contains over 15,000 codes. There are 10 codes alone for office visits, based on level of complexity and whether the patient is a new or established patient. For CT scans, there are over 150 codes based on area of the body (head, spine, legs, etc.), with or without dye, and with or without an accompanying test. Moreover, the level of payment for any given code often differs based on whether the service is provided in a facility or not. In the former case, a technical component is paid to the facility in addition to the payment paid to the physician (which is lower than it otherwise would have been). It is generally the case that the combined physician and facility payment for a given code differs from the aggregate payment if the service were provided outside of a facility.

In a FFS system, providers are paid when patients use services. There is little financial incentive to invest in programs that keep patients healthy. Investments in programs to reduce readmissions will reduce demand for hospital services and likely profits. Moreover, providers are not rewarded if they implement process innovations that allow them to provide comparable care by delivering fewer services. For example, e-mail communications are not rewarded and any program that would support better patient directed management of chronic disease with fewer provider contacts would likely not be profitable.

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