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Our health care system stands at a crossroads as it struggles with how to appropriately finance health care. The fee-for-service system, the dominant payment model in the U.S., is widely recognized as perhaps one of the single biggest obstacles to reforming health care and improving health care delivery.

Putting it simply, the current system perpetuates “more care,” not necessarily “better care.” It rewards quantity, not quality.

Total health care spending in the U.S. is expected to reach $4.8 trillion in 2021, up from $2.6 trillion in 2010 and $75 billion in 1970. It is unsustainable.

However, the momentum now is toward achieving the Triple Aim: patient satisfaction and better health outcomes at lower cost. And the movement toward “value-based reimbursement” is accelerating, with the Centers for Medicare & Medicaid Services (CMS), one of the largest healthcare payors, leading the way.

An important and timely article appeared in the July–August 2016 Issue of the Harvard Business Review titled, “How to Pay for Health Care.” The article highlights the two different payment approaches to value-based reimbursement: capitation and bundled payments.

In capitation, the provider receives a fixed payment per year per covered life and must meet all the needs of a broad patient population. It is based on a payment per person, rather than a payment per service provided. Providers are paid a “lump sum” per patient regardless of how many services the person receives, whether or not the person seeks health care.

In a bundled payment system, by contrast, the provider is paid for the care of a patient’s medical condition across the entire care cycle. It is based on the expected costs for clinically-defined episodes of care. Bundled payment arrangements are also a type of risk-based contracting. If the cost of services is less than the bundled payment, providers retain the difference (as an incentive for the delivery of better care, not more care). But if the costs exceed the bundled payment, providers are not compensated for the difference.

Note that this is a simplistic explanation. Clearly, there are distinct differences, complexities and nuances between the two approaches too numerous to describe here.

The strengths and shortcomings of each payment approach are well described in the article. The authors make the case for bundled payments as the preferred payment methodology since it directly rewards the delivery of quality care for the patient’s condition. Again, better care, not more care.

Despite the promising benefits of bundled payments to date, many hospital systems, group purchasing organizations, private insurers, and other health care programs still prefer capitation. They argue that bundled payments are too complicated to design, negotiate, implement, monitor and manage. However, those that argue for capitation ignore the fact that capitation models rely on complex and expensive fee-for-service billing processes to pay providers and that bundled payments are simpler to administer rather than the complexities of FFS payments for each patient over the care cycle.

The article states the biggest beneficiary of bundled payments will be patients, who will receive better care and have access to more choice. They also argue that the best providers (e.g., higher performing providers delivering high quality care resulting in improved health outcomes) will prosper. Bundled payments enable providers to compete on value and performance, to transform the design and delivery of care, and put the health care system on a more sustainable path going forward into the future. Better care, not more care.

Although there is still much work to further test and evaluate bundled payment approaches for scaling and adoption into widespread practice, many of the historical barriers preventing this payment methodology from being implemented are being overcome. Payment reform pilots using bundled payment methodologies are being implemented across the country as we speak.

A recent publication ACAP Medicare – Medicaid Plans and the Financial Alignment Demonstrations: Innovations and Lessons (June 2016) on the evaluation of value-based payment (VBP) financial alignment in Medicare and Medicaid demonstration projects highlighted significant promise for improving health care quality and effectiveness for dual-eligible beneficiaries. These initiatives include: (1) linking a portion of provider payments to quality outcomes; (2) establishing incentives for primary care providers (PCP) to engage in care coordination for complex patients; and (3) using gain-sharing arrangements with providers.

The Harvard Business Review authors conclude that bundled payments are the only true value-based payment model for health care.

One of the questions not often discussed or examined in the literature is establishing the true costs of providing care: pharmacy/medicine costs, medical supplies, opening new health care access points, staffing, liability insurance, operational costs, all the “touches” by staff, clinical and non-clinical, during a patient encounter, etc. Regardless, finding the “sweet spot” between delivery of quality care and managing true costs will be more important as the system moves closer to a different way of financing health care.

The time is now. Payment reform. Health care reform. Better care, not more care.