Bundled Medicare Payment For Acute And Postacute Care

PROLOGUE: More Medicare beneficiaries are using postacute care and services of higher intensity than ever before. As a consequence, a larger proportion of Medicare expenditures are being consumed for such care. Reflecting the concern of Congress over these rising costs, the Balanced Budget Act of 1997 partially addresses this issue by establishing new payment systems for most types of postacute care services. These new systems, most of which are still on the policy drawing boards, will control the payment per unit of service but not the number of units. Thus, hospitals will have an opportunity in some cases to increase their total payment by shifting patients among types of postacute care. In this paper Pete Welch, a principal analyst in the Health and Human Resources Division of the Congressional Budget Office (CBO), analyzes a possible solution: creating a “bundled” payment to hospitals that would cover the costs of a patient episode—acute plus postacute care costs. As Welch points out: “A key issue is how well bundled payments would match the combined costs of acute and postacute care.” This is a particularly sensitive question, given the hospital industry's belief that its institutions are often short-changed by Medicare. But the day of cost shifting is coming to a close as all payers become more aggressive purchasers of care. Welch, a health economist, has long been a respected fixture among the more technically qualified analysts who participate in federal policy making. Before joining the CBO in 1996, he worked as a principal research associate at the Urban Institute (1987– 1996) and as a health economist at the president's Office of Management and Budget (1984–1987). Welch holds a doctorate in economics from the University of Colorado. ABSTRACT: One legislative policy option for controlling postacute care costs is for Medicare to make a “bundled” payment to hospitals to cover episode costs: acute plus postacute care costs. But a bundled payment might not match the costs of treatment as well as payment now does under Medicare's prospective payment system (PPS). Simulating hospital margins with and without postacute care costs, this paper finds that risks to the typical hospital would not increase under postacute care bundling. A central characteristic of a bundled payment is that it would cover multiple providers. From this characteristic comes bundled payment's major strength: cost containment.