Do Bundled Payments Improve Healthcare?

Bundled payments became common during the Obama Administration as part of a strategy to increase the efficiency of the healthcare system by eliminating unnecessary procedures and reducing health care costs for consumers. What are bundled payments, and do they improve healthcare? Let’s explore.

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What Are Bundled Payments?

What are bundled payments? In bundled payments, the total allowable acute and post-acute expenditures for an episode of care are pre-determined. In that way, participating providers share in any losses or savings that occur when there is a difference in the final price. In theory, savings should be passed onto the consumer and studies have confirmed that bundling payments results in a higher quality of care at a lower cost for patients.

What are episodes of care? They include a treatment for a single medical condition or a medical event. Examples include a broken bone, joint replacement, or labor and delivery. Other common episodes of care can include a UTI, stroke, or congestive heart failure.

There are two basic systems for bundled payments: prospective payment and retrospective payment. The bundled payments model is further characterized by 4 Models. Model 1 is for an inpatient stay in a general acute-care hospital. Doctors and hospitals are paid according to an agreed upon discounted rate. The discounted rate is determined after analysis of cost history and occurrence for the procedure and the rate is agreed upon for a year. Model 2 involves an inpatient stay and post-acute care for 30 to 90 days after discharge. Model 3 is for post-acute care only and tries to reduce readmissions. Model 4 is a prospective model that establishes the amount to be paid for the bundle upfront

Problems with Bundled Payments

There are problems with bundled payments. Bundled payments may discourage necessary care that is prohibitively expensive. Providers may also suffer big losses when a patient experiences a “catastrophic event.” As a result, providers may avoid taking on patients with expensive conditions to minimize their risk of running a loss. Alternatively, they may avoid identifying a complication to an incident before the bundle is over.

The implementation of bundled payments also faces the challenge of hospital and provider heterogeneity. Bundled payment agreements vary across the country just like the quality of medical care. There is no standardized national bundled payment system which would make the process easier to administer and regulate.

Healthcare Experience vs Financial Risk

Bundled payments shift risks to providers in order to encourage them to manage costs. The system is more easily applied to procedures with defined start and end dates such as surgery like hip replacement. Bundling is less conducive to treatment of chronic conditions like diabetes. As mentioned previously, bundling can have a negative effect on the healthcare experience by discouraging providers from taking on chronically ill patients or delaying the identification of complications to a procedure.

According to Health Affairs, and based on a review of 20 studies, bundled payments maintain or improve quality while lowering costs for lower extremity joint replacement – but not for other conditions or services. They also found that policy makers should account for patient heterogeneity and incorporate risk stratification in the development of bundled payment programs.

At leading hospitals, bundled payments have been shown to generate large savings for hip and knee replacement. A 2017 study found that the average per-episode payments decreased by 21% from 2008 to 2015 with statistically significant decreases when hospitals participated in bundled payments.

Are There Ancillary Effects Of Bundled Payments?

Are there challenges associated with bundled payments? Managing costs for patient treatment that are outside of the provider’s control is a major challenge to bundled payments. For example, if patients ignore recommendations for taking medication or engage in counterproductive activities while taking the medication. Comorbidities also contribute to increased risk and costs.

“There are situations where using a bundle may be inappropriate because the factors that are influencing differences in cost among patients are things that the provider doesn’t actually control,” points out Joshua Cohen, research Associate Professor of Medicine at Tufts Medical Center. Some providers also experience technological challenges associated with implementation due to old health IT systems that lack advanced reporting and data collection capabilities.

Generally, the implementation of bundled payments creates a need for other technological upgrades. A Deloitte study found that providers at hospitals using bundled payments identified a need for increased ease of communication among specialists about patient conditions and discharge dates. Tools to engage more directly with patients and introduction of new communication channels between patients and providers were also of interest.

Could Bundled Payments Benefit Other Industries?

Bundled payments could potentially benefit other service industries offering multiple services to customers, however, the application of these systems would benefit from case-by-case analysis.


Bundled payments offer attractive benefits for patients, providers, and hospitals by creating an incentive to streamline medical procedures and increase communication among providers. Bundled payments offer systematic advantages, especially for supply chain leaders within healthcare.


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