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Physician/Hospital Alignment and Bundled Payment – Part One

The CFA Staff

Bundled or package payment across an episode of care such as a hospitalization, the subject of Medicare demonstration projects in the 1990’s, may be poised for a comeback.  


Many will remember the Medicare CABG demonstration project of 1991-1996 – an early attempt to promote incentives through physician/hospital alignment.  Subsequently, there was an attempt to expand upon this demo with select cardiovascular and orthopedic procedures a few years later that never got off the ground.

The Medicare Payment Advisory Commission’s (MedPAC) June 2008 Report to Congress touted bundled payment as the best way to achieve the objectives of “financially motivating hospital/physician collaboration in identifying and implementing opportunities to limit the use of low-value services, coordinate beneficiaries’ care, and working together to improve efficiency…”  ( is worth reviewing this document in its entirety as a background on MedPAC’s thinking.  Various bundled or global payment projects are ongoing regionally, including Medicare’s Acute Care Episode (ACE) Demonstration, Prometheus Payment, Geisinger Health System’s ProvenCare program in Pennsylvania, Integrated Healthcare Association in California, and various hospital and employer/business coalition-sponsored initiatives.  A national pilot program on payment bundling is included in H.R. 3590, the Patient Protection & Affordable Care Act (See Part Two of this topic for a more detailed discussion).


Previous demonstration projects, including the Medicare CABG demonstration, concluded that bundling payment successfully lowered costs, promoted collaborative medicine and produced acceptable levels of quality and customer satisfaction.  We all knew intuitively that it would (or should!)  Subsequent bundling projects by the Federal government were never implemented and widespread adoption of the methodology never took place.


Importantly for us all, very few hospitals and physicians have ever participated in bundled payment initiatives of any type.  We are not including capitation as a related, but very different animal.  Most of us that have participated in these efforts in the private payer arena remember how difficult it was to reach an accord between hospitals and physicians over participation in general and pricing in particular.  Beyond the legal issues of negotiating price between competing entities, non-aligned physicians had little real reason to participate.  Generally conservative and skeptical of government (and maybe consultants too), the private bundled price market was seen as just too small and risk-prone for them.  In reality, their intransigence proved prescient, and this market, where it existed at all, simply disappeared until recent events resurrected it.


It would seem that everything old is new again and bundled payments are back, although not in most markets and not at this time.  Will this trend be revitalized and become predominate in some markets?  Time will tell.  Certainly times and market conditions have changed for healthcare and physicians in particular.  Economic conditions, changing regulation and the shape of healthcare reform will dictate if this trend really gains traction. 


What lessons can be learned from the completed and currently ongoing bundled payment projects?  What benefits are derived by hospitals and their medical staffs to participate in such ventures?  Is participation more strategic or practical?  Is physician/hospital alignment mandatory for success in this market, and what model(s) are advantageous (if any)?  Can market share be moved?  How would a hospital prepare for such a radical change in reimbursement?  How viable a trend are bundled payments?  What role does each of the stakeholders play in the increasing adoption of bundled payments by government, businesses and managed care organizations? These and other questions are open and will need to be addressed by hospitals and physicians (aligned and non-aligned).


We believe that hospital preparation for bundled payments will be critical to success.  Those that have adopted aggressive hospital/physician alignment strategies have laid a positive foundation, but will also have to make significant operational, informational, clinical and financial preparations for the close working relationship necessary to be successful.


This blog is the tip of the iceberg on this subject.  In part two, we will review the H.R. 3950 bundled payment demonstration. CFA will continue to provide its insight on hospital/physician alignment and bundled pricing, and would welcome your thoughts and comments as we progress.


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