Bundled payments and technological changes

Bundled payments are a common method of paying for inpatient stays and some broader disease courses. The Center for Medicare and Medicaid Service (CMS) uses the Inpatient Prosepctive Payment System to pay for the vast majority of Medicare inpatient admissions at non-Critical Access Hospitals. A prospective payment is triggered by a set of diagnosis and procedure codes. The hospital gets a big check to take care of a patient. If the hospital spends less than the check, they pocket the difference, if they spend a bit more than the check, they are coming out behind. CMS will add in outlier payments and several other modifiers.

Hospitals have a set of costs for a given condition. There are a lot of factors that drive costs. There are the inpatient room costs, there are staff costs, there are infusion and injectable drug costs, there are lab costs and there are dozens of other potential cost centers. The prospective, bundled payment is designed to be sufficient to cover these costs on average.

However CMS does not dictate how hospitals are to treat patients (past basic quality measures). Hospitals can figure things out themselves. A given hospital will look at its attributes and cost structures and may decide that they’ll commit to longer stays and more nursing days but fewer imagining studies. Another hospital will look at its endowments and decide that more injectables and imaging but shorter stays will be its preferred method. Both hospitals could produce the same exact risk-adjusted outcomes at the same cost. But the way that they get there can (and will) be very different. Under bundle payments, the payer is fundamentally indifferent to how the outcome is produced.

Now let us imagine that a wizard comes along and can wave his wand and mutter a few things in bastardized Latin. Those actions suddenly reduce the need to use a fairly expensive in opportunity cost if not actual cash cost by 25%. There are not changes in other outcomes but the same outcome will be produced with fewer resources used. What is that wand waving worth?

Under a bundle payment scheme, that wand waving is probably worth pretty close to the opportunity cost of the 25% of the constrained resource. If the resource is merely cotton swabs, it might be worth a dollar. If the constrained resource is three hours in the operating, it can be worth thousands of dollars. What does the wand waving directly substitute for is what will determine a price that the hospitals will be willing to pay.

Now let us suppose that the wand waving reduces use of a resource that under the prior standard of care costs $20,000 on average. The new, wand waving enabled standard of care only uses $15,000 of that resource. If a hospital can get a wand wave for under $5,000, the bundle payment incentive is for the hospital to smile and get as many wand waves as possible.

Does this make sense?

Now let us replace wand waving with technological innovation in the form of a new injectable drug that is typically covered by the bundled payment. If the infusion reduces the number of days that a patient is in a bed, that is a valuable substitution even if there are no other mortality, morbidity or side-effect gains. The substitution is really valuable for the hospital. Some hospitals that are not particularly constrained on bed availability and has a cheap labor force may not buy many doses of the new injectable, but other hospitals with few available beds and an expensive labor force will substitute technology for time. And they will be willing to pay quite a bit for that substition as they will still be coming out ahead.