Cost Savings and Physician Responses to Global Bundled Payments for Medicare Heart Bypass Surgery

By Cromwell, Jerry; Dayhoff, Debra A. et al. | Health Care Financing Review, Fall 1997 | Go to article overview

Cost Savings and Physician Responses to Global Bundled Payments for Medicare Heart Bypass Surgery


Cromwell, Jerry, Dayhoff, Debra A., Thoumaian, Armen H., Health Care Financing Review


INTRODUCTION

In 1988 HCFA solicited proposals from more than 40 hospitals and physicians to participate in the Medicare Participating Heart Bypass Center Demonstration, which would pay a single negotiated global price for all inpatient care for heart bypass patients. The goals of the demonstration were to show the kinds of cost savings to the Government possible from negotiated bundled payments for Medicare heart patients, to encourage regionalization of the procedure in higher volume hospitals, and to align the incentives of physicians with those faced by hospitals under prospective payment. In May of 1991, after extensive evaluation of the 27 final applicants, HCFA began paying four institutions in Boston, Atlanta, Ann Arbor, and Columbus, Ohio, a single global payment covering both Part A and Part B services provided any Medicare bypass patient classified in diagnosis-related groups (DRGs) 106 (with catheterization) and 107 (without catheterization). No separate inpatient billing was allowed. Two years later, the agency expanded the demonstration to include hospitals in Houston, Indianapolis, and Portland, Oregon.

By negotiating fixed discounts on average payments for DRGs 106 and 107, the Medicare program and its beneficiaries are assured of savings unless outpatient expenses associated with demonstration bypass patients rise faster than expected. Lower average payments, on the other hand, mean lower, or even negative, margins for the participating hospitals. Unless participants can reduce their costs of treating bypass patients, they may incur losses that may be unsustainable in the long run.

The key to determining profitability under the negotiated demonstration is whether hospital costs fall when physician incentives to reduce spending are aligned with hospital incentives under DRG prospective payment. Many physicians might argue that their inpatient practice patterns are unaffected by financial incentives: They give each patient needed care--especially very ill coronary artery disease patients requiring bypass surgery. Others, however, might argue that more cost-effective practice patterns can be implemented even for bypass surgery, as long as physicians are willing to cooperate with hospital administration.

The economic literature (Pauly and Redisch, 1973; Pauly, 1980; Harris, 1977) raises the hypothesis that physicians tend to treat the hospital as their workshop. To them, the inputs to patient care are practically free, including nurse time, radiological supplies, drugs, intensive care unit (ICU) telemetry, scanners, echocardiography, electrocardiograms (EKGs), and cardiac catheter devices. Surgeons and cardiologists pay nothing for this equipment and support in the inpatient setting; these costs are external to their own practices. Once physicians are under a single global rate, however, all of these costs are internalized. Realizing that more cost-effective practice patterns could save the hospital money, surgeons, in particular, may conserve on scarce resources in various ways. They might do so either out of a concern for the financial solvency of the hospital under the demonstration or in response to incentives to share in any cost savings by receiving a larger share of the global payment.

Key evaluation questions concerning Medicare program savings include:

* What were the total savings to the Medicare program and to beneficiaries from the demonstration?

* Was care shifted to a postdischarge setting, thereby reducing the savings from the bundled inpatient rates?

Whether Medicare and its beneficiaries can negotiate discounts and save money is only half of the overall policy question. If providers lose by failing to bring down costs, the discounts are not sustainable in the long run. Hence, equally important is how successful participants were in changing practice patterns to control costs. Additional questions include:

* Did the bypass costs of demonstration hospitals rise more slowly under fixed global payment than they would have under DRG prospective payment?

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Cost Savings and Physician Responses to Global Bundled Payments for Medicare Heart Bypass Surgery
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