Will bundled payments hurt healthcare innovation?

Bundled payment models —which involve a set price intended to cover each element of clinical care or support for a specific procedure or condition — could prove an effective way for the care providers to contain costs while improving quality. However, some healthcare industry stakeholders have raised concerns about a possible downside to bundling payments: stifling innovation.

As the healthcare industry transitions from fee-for-service to value-based payment models, a growing number of providers are exploring bundled payments. In July, for example, CMS announced it would add 4,122 providers to phase 1 (a non-risk bearing level) of Medicare's Bundled Payments for Care Improvement Initiative —in addition to 2,412 other providers already participating.

Bundled payment models —which involve a set price intended to cover each element of clinical care or support for a specific procedure or condition — could prove an effective way for the care providers to contain costs while improving quality. However, some healthcare industry stakeholders have raised concerns about a possible downside to bundling payments: stifling innovation.  

In a September Health Affairs blog entry, Rebecca Paradis, a senior health policy associate at the Network for Excellence in Health Innovation (a nonprofit, nonpartisan health policy institute), raised the question of how the new payment model will impact medical advancement: "Bundled payments are here to stay, but there remains serious apprehension among innovators adjusting to this evolving landscape."

Why innovators are worried: Cost-cutting and quality measures
Ms. Paradis' article draws on concerns expressed by healthcare industry members at an event NEHI hosted in July focused on what the rise of bundled payments means for innovation. There, payers, providers, device makers and others shared their thoughts on what payment reform could mean for them and the industry in general.

During one panel, Jeffrey Binder, president and CEO of the medical device manufacturer Biomet, said that while it's still too early to gauge how bundled payments will influence the medical device arena, the new reimbursement model could potentially harm innovation, in the case of inadequate quality measures and  a sharp focus on cost-cutting.

"While the cost measures are very, very precise, the quality measures associated with these programs tend to be a lot more general, not very specific to individual procedures, and have a very difficult time, for obvious reasons, taking into account long-term impact," he said. "Let's say the quality measures aren't as far along as the cost measures. I think you do have the potential to create disincentives for hospitals and for surgeons now to adapt new technologies especially where those technologies might be a little bit more expensive in the short term and the potential benefits might be in the longer term."

For instance, he said his company was introducing a new implant that would allow total knee replacement patients to preserve their ACLs. From experience with partial knee replacement patients, Biomet knows those who preserve their ACLs have much higher levels of satisfaction. However, current quality metrics aren't sophisticated enough to take that into account, Mr. Binder said during the NEHI event. Because the new implant comes at a higher price, he worries that surgeons participating in bundled payment models might pass it up with cost cutting in mind, despite the potential for much higher patient satisfaction.

Molly Burich — senior manager of government affairs, reimbursement and policy at Otsuka America Pharmaceuticals and another panelist at the NEHI event — echoed Mr. Binder's concerns about quality metrics, saying one of the aspects of bundled payments that gives her "heartburn" is the question of whether quality metrics are moving fast enough to keep up with the adoption rate of the new payment model. "The devil's in the details in bundled payments," she said. "I think that's part of the challenge but also the opportunity. It's really about a multi-stakeholder approach and everyone having a seat at the table and having a voice."

In Health Affairs, Ms. Paradis writes that "quality metrics are not moving as fast at the pace of bundled payments adoption and are not yet creating adequate safeguards for patient access to innovation." Subsequently, that could mean manufacturers won't have the proper incentives to innovate and seek improved outcomes. Without solid quality metrics to assure reimbursement, she warns bundled payments could hurt venture capital, innovations trying to break into the marketplace and established manufacturers looking to improve existing technologies. 

Additionally, she writes bundled payments could hinder research at academic medical centers: "If AMCs are now competing on cost they will not have the same additional revenue to uphold their ability to conduct research, educate the next generation of physicians, and provide innovative care."

If bundled payment models aren't constructed properly, they could limit patients' access to innovative care options and technologies, according to Richard Price, a senior vice president in the healthcare delivery policy department at the Advanced Medical Technology Association (one of the sponsors of the NEHI discussion in July). "With the promise of gainsharing rewards, physicians may think twice about providing beneficiaries the options that are most appropriate for their healthcare conditions, especially if they cost more," he says.

AdvaMed also has concerns about quality measures not advancing fast enough to capture the value of new technologies and care methods. Mr. Price says his organization recommends that patients receiving innovative technologies or procedures shouldn't get factored into the quality score equation for bundled payment agreements and other value-based payment models, to the extent that measure are about processes of care "so that providers in these programs do not face disincentives for using appropriate innovative technologies for their patients."

Others take issue with bundled payments for different reasons. Bobby Grajewski, president of the healthcare innovation marketplace Edison National Medical (where anyone, from physicians to patients, can submit ideas for review and possible commercialization) says bundled payments "can and do discourage innovation." His concern is that bundles mask the prices of individual items and products involved in an episode of care, if clinicians provide the treatment for one overall payment.

"When you don't know where the line is, it's very hard to judge, very hard to create innovations that are really driving value, because the payer doesn't know what they're paying for," he says.

Could bundles drive out low-value innovation?
Some healthcare experts, however, maintain bundled payments will have the much-needed effect of pushing "low-value" innovations — those that deliver negligible improvements in outcomes for relatively high costs — out of the market. In response to Ms. Paradis' article on the threat bundled payments pose to innovation, Francois de Brantes, executive director of the nonprofit Health Care Incentives Improvement Institute, commented on the Health Affairs website: "There's no question that medical innovation in the past two decades has brought life-saving therapies to the U.S. market, even though sometimes the price point for that therapy was simply based on what the flawed third-party payer market was willing to pay rather than any rational pricing. There's also little question that the medical technology arms race has created machines of questionable or no incremental value. All of these innovations, both good and bad, have often found a lucrative market because of the core fee-for-service reimbursement model."

As far as medical devices and durable medical equipment are concerned, innovative technologies haven't been subject to the same sourcing rigor as products in other industries, according to Mr. de Brantes. For example, he says hospitals often choose implants based entirely on surgeon preference or vendor marketing: "It has nothing to do with anything except how much the vendor feels they can get from that particular purchaser."

Bundled payments will make providers more disciplined in deciding which products to use, considering cost and outcomes carefully. "All of that is going to reshape that sector of the industry that has been able to get away with high prices irrespective of the quality of the product," he says.

As for innovative treatment regimens, Mr. de Brantes predicts policymakers will safeguard them from any negative effects from payment reform: "I'm less worried about that type of innovation. I think in most bundled payment programs…innovative new therapies are often excluded completely from the bundle."

Alan Sager, PhD, a professor of health policy management and director of the health reform program at the Boston University School of Public Health, agrees that bundled payments will lead to a long-overdue shift in the innovation landscape. "It's useful to step back and recognize that innovation in healthcare has for decades been unnaturally insulated from financial considerations and from effective cost controls," he says.

Bundled payments won't kill innovation but could merely redirect it, according to Dr. Sager. "Drug makers and device manufacturers and the entire venture capital industry may identify investment and innovation opportunities in areas where cost reduction is feasible," he says. "There's a possibility that, in the future, organized systems of care…will be vastly receptive to cost-reducing innovations that substitute for today's high-cost medical devices. And this may benefit Americans directly if the cost of needed healthcare is lowered. Particularly, that may make it easier to shift the focus from raising the ceiling — the best U.S. healthcare can do — toward raising the floor — the worst we do."

Joel Shalowitz, MD — a clinical professor and director of health industry management at the Kellogg School of Management and professor of preventive medicine at the Feinberg School of Medicine at Northwestern University — also predicts that bundled payments will just hurt innovations that are "very expensive" and don't significantly improve outcomes: "A product that's going to be extremely expensive with marginal benefits should not be embraced as much as one that will improve care and lower costs. Let the market decide."

Rather than stifling innovation, bundled payment models offer a platform for it, according to Rob Lazerow, a practice manager of research and insights at The Advisory Board Company. "I tend to think that bundled payments focus innovation on discrete episodes of care," he says. "It's channeling innovation on efficiency and quality improvement."

He acknowledges that the variation in key quality metrics among the different bundled payment contracts can create a challenge for providers, but he anticipates the industry will resolve that issue with time, as providers and policymakers figure out which metrics should be included through experimentation and achieve standardization.

Ms. Paradis of NEHI says she actually agrees that bundled payments will benefit the healthcare industry by driving out low-value innovations. Still, she emphasizes that better quality measures are necessary to achieve the triple aim and accurately assess value: "We want to pay for the right things in areas where we know what works and how to make it work. We really only know that with the right quality metrics."

Devil in the details: The importance of payment model structure
Others say bundled payments could either hurt innovation or have a positive influence on it, depending on how the new reimbursement models are constructed. John Colmers, vice president of healthcare transformation and strategic planning at Baltimore-based Johns Hopkins Medicine, agrees that bundled payments won't stop the production of new technologies and care methods as long as the reimbursement amounts as "reasonably achievable."

 "We think that if the payment model itself is fairly structured it can encourage innovation," he says. Johns Hopkins' hospitals operate under Maryland's all-payer hospital rate setting system, under which facilities in the state receive the same payment amounts from all government and private health insurers. In January, the state overhauled the payment model and switched to global hospital budgets to contain costs.

Gary Ahlquist, a senior partner with Strategy&, a global management consulting arm of PwC, says bundled payments will drive "an explosion of innovation" if implemented correctly. CMS' BPCI initiative, however, could stop innovation, he says: "The CMS model basically accumulates a series of [diagnosis-related groups]…to create a price for a bundle, and it does it retrospectively. So by its nature, it's a look back at an existing payment construct, which can have the effect of causing the delivery systems to reduce costs and not much more."

But he says CMS' design is "behind the curve" in the bundled payment world. The state-of-the-art models are consumer-centric, working to engage patients and their families to deliver the care they need. This approach will also lead to evolution in quality metrics, Mr. Ahlquist says: "Once you put the consumer in the middle of the design, then quality of care but also quality of experience of the process become important."

The unclear future of bundled payments and innovation
Going forward, Ms. Paradis has recommended several steps to ensure bundled payments don't hurt innovation, including the development of safeguards like carve-outs for new innovations, efforts to gather data on cost and clinical effectiveness to support innovation, and multi-sector discussions to coordinate and reach a consensus on strengthening quality metrics.

Only time will tell whether bundled payments will actually boost innovation or suffocate it, she says: "We here at NEHI think bundled payments are an amazing opportunity. There's a lot of good in them. I think that was the reason I included the quote from Molly [Burich] in my blog. I think she said it right. The devil is really in the details. Bundled payments can be good or bad, depending on how they're constructed."

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