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?


Medicare Eligibility: The Next Policy Battleground

In Washington this week, discussions continue in an effort to reach agreement on a comprehensive deal that will avoid the impending Fiscal Cliff.  Healthcare remains a central part part of the debate.

While much of the attention regarding healthcare policy over the past few years has focused on healthcare providers and the economics of how those providers are paid – or not – for their services, there has been an elephant in the room all the while that most politicians and elected officials wisely seek to steer clear of: that being, policy decisions impacting the financial burden on Medicare beneficiaries.

With Democrats holding fast to collecting on what they feel the presidential election afforded them – a mandate to raise taxes on the wealthy; and with Republicans demanding real and meaningful action to lower entitlement spending, the Medicare program is very squarely in the horse trading crosshairs.   Of course, there is a lot of disagreement and controversy over whether Medicare should be considered an entitlement.

On the one hand, to the extent Medicare expenditures were funded by beneficiaries through taxation it does not fit the traditional definition of an entitlement like Medicaid or unemployment benefits.  On the other hand, given a myriad of contributing factors (e.g., most prevalently being advancements in medical technology and the accompanying impact on longevity), significantly more is spent per beneficiary today than was contributed.

According to an Urban Institute research paper, in 2011 a two-earner couple retiring  with a combined income of apx. $87,500 (defined as the average wage), would have paid about $116,000 into the Medicare program during their lifetimes.  That same couple can expect lifetime Medicare benefits of $357,000 net of premiums.  And given the current trajectory, in 2030 an average-earning couple will pay $175,000 in Medicare taxes but receive a benefit of $527,000. 


So call it what you will, in the real world where accumulated deficits are resolved through bankruptcy and/or cessation of operations, the phenomenon described above represents a significant funding gap that results in the assessment of financial burden for Medicare expenditures on a broad base of the population not receiving benefits.  That sure sounds like an entitlement, does it not?

Regardless of what it’s called, the problem with raising the age of Medicare eligibility as a policy solution aimed at closing the funding gap is that it only avoids expenditures for those seniors otherwise able to afford healthcare.  This presents both fairness and pragmatic challenges.  For those individuals in the 65 – 67 age cohort unable to pay the cost of their healthcare, some form of cost subsidy will still be required: whether that is through Medicaid, insurance premium subsidization under the Affordable Care Act or cost shifting in lieu of uncompensated care.

Those challenges are causing some members in Congress to consider Medicare means testing as a potential alternative to raising the eligibility age.  This is an idea that President Obama has also publicly supported in the past.  The approach would lower Medicare benefits as a function of income.  From a purely economic vantage this is a more efficient approach because there is a much higher correlation between the targeted  population of the policy and the desired financial impact on the Medicare program.

Means testing will not be not an easy sell politically, however, when considering the enormous amount of political clout held by that portion of the electorate to be affected.  The media monster that is AARP will almost certainly be effective in portraying any attempt to implement means testing as robbing from the vulnerable elderly.  No easy answers here, folks.

Way back in the day, I used to do a lot of work as a financial advisor and was involved in several debt restructurings.  What I learned through that experience was the best possible outcome meant having all parties involved equally dissatisfied with the result.  I wonder if that’s a scenario that anyone in Washington could possibly accept where a deal on the Fiscal Cliff is involved.




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