Challenges of Episodic Payment Bundling

Last week the New England Journal of Medicine included this Perspective: Post-Acute Care Reform—Beyond the ACA by D. Clay Ackerly, M.D. and David C. Grabowski, Ph.D. The article describes the case of what I believe is a hypothetical patient: Mrs. T., an 88-year-old woman who was admitted to the hospital following a trip to the emergency room.

You can read the article to get the specifics of her case. The thrust of what is shared by the authors has to do with how existing Medicare payment methodologies and regulations impact clinical decision making in ways that are not necessarily in the patient’s best interest. And how payment bundling—particularly across acute and post-acute/long-term care providers—faces challenges that simply aligning financial incentives of those provider types will not adequately address.

In theory, the core precept of episodic payment bundling is that if otherwise historically disparate healthcare providers treating the same patient can be financially incentivized to better coordinate care for that patient, the costs attributable to inefficiencies, redundancies, productivity, etc. will be reduced.

Of course, underscoring this precept is the notion that human beings acting in their self interests (i.e., in pursuit of income and wealth ~ Adam Smith’s Invisible Hand) will create valuable external benefits. The counter to this belief could be found in Garret Hardin’s Tragedy of the Commons, which argues that those self interests can lead to depleting common resources to the disadvantage of wider interests – e.g., the community or society.

Economic theory aside, what the authors argue for is additional governmental intervention to remove obstacles they cite as impeding the benefits that payment bundling might otherwise achieve. These include addressing regulations impeding patient transfers between settings (e.g., the 3-day rule); research into various care delivery models that facilitate more effective care transitioning – particularly those elements outside of the clinical setting; and third, increased investment into comparative effectiveness research to help providers better determine appropriate post-acute/long-term care setting for their patients.

So here’s the irony: though many critics of the Affordable Care Act either disbelieve or refuse to accept that it was in many ways an attempt to thwart or at least delay the movement toward a national healthcare system, concepts like payment bundling, insurance exchanges and capitation are theoretically dependent upon market-based solutions. Provide the financial incentive and just watch market-driven forces create valuable solutions.

Now we are being advised in this article that’s not enough. We have to also regulate away the challenges and obstacles that market ingenuity was supposed to overcome. Sorry – but isn’t that somewhat counterintuitive?

Here’s the challenge. We recognize that individuals’ productivity – in terms of being able to create value – is closely correlated with their desire to pursue individual needs and wants (back to basic Economics). And so if we want to maximize value it follows that we need to maximize individual incentive. In a free market that is most effectively accomplished by allowing individuals to make their own choices, unfettered from governmental interference except for ensuring fairness and safety.

What we are trying to do in healthcare—with initiatives such as ACOs—is create hybrid free market models that leverage the value production ability of individuals while at the same time intentionally and unintentionally interfering with their ability to make unfettered choices. So if healthcare shared common characteristics with other industries, it would be easy to argue that government should just get the hell out of the way.

But here’s the rub. Government is already so deeply entrenched in our healthcare delivery system – at a time where demand is just beginning to grow exponentially – that I fear any serious effort to move backward toward market-based delivery would be like throwing a track switch on a runaway train. And beyond that I remain unconvinced that healthcare is not uniquely different than other industries. Thus we plod along.

What do you think?



  1. Garret Hardin was an ecologist and warned of the dangers of overpopulation. He believed in restricting reproductive rights and the only major nation I can think of that accepted that policy was the People’s Republic of China. We can clearly see the ecological tragedy of the commons where our environment is concerned and discuss those tragedies individually as some so called tragedies make little sense. But, if I am correct, he also talked about the tragedy of the commons with regard to the welfare state state. Welfare promotes ‘overbreeding’ leading to the Tragedy of the Commons. We saw that result in India in the latter half of the 20th century.

    I don’t know how Scot is using the Tragedy of the Commons to prove his point unless he is looking towards repression of the nature seen in Communist China. I think, Scot, like you distort the Tragedy of the Commons you also distort classical economic theory to prove your point. You will only be able to accomplish your gigantic balancing act of a so called hybrid ‘free’ market at the point of a gun.

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