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As lawmakers consider ways to pay for health reform, use our glossary of potential offsets to get caught up fast.

Updated at 2:35 p.m. on Nov. 23 to reflect continuing legislation.


Rather than paying health care providers for each service provided, a bundled payment would be a single, fixed compensation for a patient's stay and, potentially, follow-up care. This flat payment would cover all treatments and expenses, motivating hospitals to reduce cost and volume of services.


Executive Summary

President Obama mentioned a number of plans to reduce Medicare spending in his June 15 speech to the American Medical Association, but one in particular was beginning to sound familiar.

"We need to bundle payments so you aren't paid for every single treatment you offer a patient with a chronic condition like diabetes, but instead are paid for how you treat the overall disease," Obama said.

That same day, Health CEOs for Health Reform -- a group of executives from health care industry groups like Blue Shield of California, Catholic Healthcare West and Merck & Co -- endorsed a bundled payment system in a white paper for Congress. And that month's Medicare Payment Advisory Commission report to Congress included a bundled payment proposal.


Under a bundled payment system, hospitals would be paid one time for multiple services instead of for each service. For example, a hospital would receive a fixed payment for radiation treatment or a hip replacement, procedures that require multiple services over time. A bundled payment option could also include funds for post-acute care. Medicare already has a system similar to bundled payments through diagnosis-related groups, but this reform would expand on it and likely include physician payments.

According to Mayo Clinic President Denis Cortese, bundled payment plans prompt hospitals to deliver the best possible care.

"Once you have a bundled payment, the delivery system can really do anything they want because the money's on the table," Cortese said. "But the incentive is to get it right the first time. If there's a failure, you have to redo it on your nickel."

Having the fixed payment could deter hospitals from performing unnecessary services and motivate them to keep care efficient. Including post-acute care in the payment would compel hospitals to keep post-acute care costs to a minimum as well, and it would also keep hospitals in charge of a patient's entire care system, reducing unnecessary repeated tests and complications from coordinating with several specialists.


Opponents to the plan say that the fixed sums could lead hospitals to slash services to the bare minimum, particularly in post-acute care. They say an across-the-board payment standard wouldn't account for regional and diagnostic differences in costs, leaving some doctors with insufficient payment. Don May, vice president for policy at the American Hospital Association, said bundled payments would only work with controls set in place.

"To make it effective, you have to tie it to quality," May said. "You do it in areas where you measure the outcomes."

A third option would include physician services in the payment, combining Medicare Part A and Part B payments. This would further motivate hospitals and physicians to manage care together and keep all aspects of a treatment plan efficient. However, some medical organizations have expressed concern about combining doctor pay with a hospital payment, since it could lead hospitals to limit physician services and would force doctors to turn over some control of their incomes to hospitals.

This year, Medicare started experimenting with bundled payments split between the hospital and physician to see what models would create the most savings. Pilot programs have reported success in both reducing payments and attracting patients.

Max Savings

In its December 2008 report, the CBO estimated that bundling payments for hospital and post-acute care would save $700 million by 2014 and $18.6 billion by 2019. The plan would not go into effect until 2013, accounting for the relatively low savings before 2014.

Most Compatible With

A bundled payment plan would be most effective with performance-based bonuses or penalties to ensure that providers are giving the best care with the limited payments.


Both the House and Senate bills would expand bundling pilot programs. The bill passed by the Senate Finance Committee would have set up a multi-hospital and -provider bundling program by 2013.


Obama's speech to the AMA

Health CEOs for Health Care Reform white paper

MedPAC's 2009 Report to Congress, with a section on Accountable Care Organizations

December 2008 CBO report on health care options (bundled payments are option 30)

Wall Street Journal article on Medicare payment options, including bundled payments

• USA Today report on bundled payment pilots in Tulsa and San Antonio

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