The Lessons Of Medicare’s Prospective Payment System Show That The Bundled Payment Program Faces Challenges

TLDR

Policy makers have long sought to replace Medicare’s fee‑for‑service system with bundled payment models, beginning with the hospital prospective payment system introduced in 1983–84. The study aims to evaluate Medicare’s bundled payment initiative, rewarding cost‑effective care and improving efficiency while maintaining quality, and to analyze lessons from the hospital prospective payment system. The authors examine Medicare’s 2011 expansion of bundled payments linking multiple services per episode and analyze the implementation and hospital responses to the hospital prospective payment system. They find that the hospital prospective payment system had limited impact on overall Medicare spending, and that payment reforms must adapt to the health system’s components and align with private insurance reforms to effectively change provider behavior.

Abstract

Policy makers have been trying to replace Medicare's fee-for-service payment system for years with approaches that pay one price for an aggregation of services. The intent is to reward providers for offering needed care in the most appropriate and cost-effective manner. Medicare's first payment change designed to accomplish such a change was the hospital prospective payment system, introduced during 1983–84. But because it focused only on hospital care, its impact on total Medicare spending was limited. In 2011 Medicare began a new initiative to expand the "bundled payment" concept to link payments for multiple services that patients receive during an episode of care. The goal of Medicare's current bundled payment initiative is to provide incentives to deliver health care more efficiently while maintaining or improving quality. This article provides a detailed analysis of how Medicare implemented the hospital prospective payment system, how hospitals responded to the new incentives, and lessons learned that are applicable to the bundled payment initiative. The lessons include that any Medicare payment reform needs to continuously respond to the many different components of the health system and that payment reform should be coupled with analogous reforms in private insurance payment, so that providers receive consistent signals to alter their behavior.