Medicare P4P Part B

Episode-Based Payment Bundling in Medicare

Bundled payment has been gaining popularity in the minds of policymakers.  In essence, a bundled payment structure gives providers a single lump sum payment to cover all related services for an episode of care.  In the private sector, the Texas Heart Institute and Geisinger Health System both charge a single lump sum for certain procedures. This payment scheme transfers risk from the payer to the provider, but also gives the provider an incentive an incentive to economize (in both the positive and negative senses) on care.

A paper by Birkmeyer et al. (2010) examines the services which would need to be included to create a bundled payment.  The authors examine 4 surgical procedures: coronary artery bypass (CABG), hip fracture repair, back surgery, and colectomy.  These procedures were chosen since they are 1) common, 2) expensive and 3) involve significant physician discretion in terms of the services provided. Their respective total cost were: $26,515 for back surgery, $27,572 for hip fracture repair, $28354 for colectomy, and $45,358 for CABG.

As the chart below demonstrates, there the paper presents two key findings. First, the vast majority of the costs went to hospitals, mostly for the index hospitalization.  Less than 15% of cost went for readmissions or payments to surgeons. Secondly, a large number of providers are involved in patient care for any one of these bundles. Thus, determining which of the many providers is actually responsible for episode cost may be difficult.


To construct these figures, the authors used Medicare claims on episodes beginning in from 2005. Episodes for these for conditions were identified using the appropriate ICD-9 procedure codes. Claims data including information from inpatient, carrier, outpatient, home health, SNF, long stay hospital and DME files. Only services provided within 30 days of the index hospitalization discharge where included in the episode. The authors admit this is arbitrary–as surgery related services provided after the hospitalization (e.g., rehabilitation services)–will be excluded from the bundle. Payments were price standardized using the Gottlieb et al. (2010) method; CMS reimbursement for capital expenses, education cost and bad debt were excluded.

Implementing the bundling system faces a number of key challenges. For instance, the flat rate payment gives physicians an incentives to decrease cost and potentially “skimp on necessary care.” Secondly, “there will be considerable gray area in determining which services go in the bundle. For example, readmission for a complication unambiguously related to the operation (e.g., surgical site infection) would clearly be bundled. But what about patients readmitted 3 weeks after CABG with pneumonia or congestive heart failure, conditions that might have occurred in the absence of surgery?”  Additionally, there were 46 million inpatient surgeries in 2006 and correctly specifying the services to bundle in each of these procedures will be a time-consuming, politically sensitive endeavor.

Leave a Reply

Your email address will not be published. Required fields are marked *