There is No Such Thing as an “Unbundled” Medical Bill

Have you noticed that quite a few of my Health Alerts are devoted to pointing out the obvious? If so, you probably have an ounce or two of common sense. If you do, that makes you somewhat of a rarity in the field of health policy. Bear with me anyway. What follows may come in useful at cocktail parties and other gatherings where you find the need to respond to people who say silly things.

Have you noticed that quite a few of my Health Alerts are devoted to pointing out the obvious? If so, you probably have an ounce or two of common sense. If you do, that makes you somewhat of a rarity in the field of health policy. Bear with me anyway. What follows may come in useful at cocktail parties and other gatherings where you find the need to respond to people who say silly things.

Today’s topic is bundling. “Saving by the Bundle,” was the clever title of Zeke Emanuel’s editorial in the Sunday New York Times. That same day, Health Affairs alerted me to a less elegantly titled study [gated, but with abstract], “Large Variations in Medicare Payments for Surgery Highlight Savings Potential from Bundled Payment Programs.”

Emanuel explains it this way:

[W]e must introduce “bundling” — which, as the name implies, means paying for a patient’s entire care episode rather than every single test and treatment he gets. Imagine, for example, a patient who comes to the hospital for a hip replacement. That patient and his insurer (whether it’s Aetna or Medicare) will be billed separately for the X-rays, laboratory tests, the surgeon’s fee, the anesthesiologist’s fee, the rehabilitation services, the hospital bill and the visits to the doctor after he’s discharged.

In a bundled payment system, all the bills are rolled into one standard hip-replacement charge. The idea is to force all of a patient’s care providers to work together. They have a strong incentive to eliminate unnecessary tests and treatments and use less expensive implants, drugs and devices that don’t compromise quality, and to prevent infections and other complications that could land the patient back in the hospital.

My first reaction was: Darn, why didn’t I think of that. My second reaction was: What would an “unbundled” payment look like? Answer: there aren’t any.

Think of something very basic, like a routine physician’s office visit. Let’s say you get weighed, have your temperature taken, have your blood pressure measured, complete a health history and recite any symptoms that currently afflict you. There, that gives us five separate tasks and the visit has barely gotten underway. If you’re a Medicare patient, does Medicare make five separate payments for each of these activities? Of course not. What about BlueCross? No way. What about employer plans or other insurers? Never. Insurers typically pay one lump sum for a routine physician visit, regardless of what takes place while the patient is there.

Okay, so we’ve learned something very important. Even for the most simple of interactions with the health care system, there is always a “bundled” payment covering a group of services.

Here is something else you need to know. Every producer of every product in every market faces a bundling problem. The issue: what features of the product should be combined and sold as a bundle, and what features should be priced separately? My iPad, for example, comes with all kinds of bundled features. (To tell the truth, I’ve only mastered a small fraction of them.) But there are also a large number of apps I can purchase separately; and each of those is yet another bundle.

So how do the folks at Apple decide what to include in the iPad bundle and what to sell separately? I have no idea. What I do know is that they have an incentive to maximize profit. And economic theory tells me they do that by maximizing the satisfaction consumers get per dollar of purchase.

In health care, as readers of this blog already know, we have systematically suppressed normal market forces. That means we have suppressed the very incentives needed to get the bundles right. So, not surprisingly, the way care is typically bundled is inconsistent with efficient delivery.

The best book I have read on this subject is Michael Porter and Elizabeth Teisberg’s Redefining Health Care, which is now about 5 1/2 years old. But whereas Zeke Emanuel writes as though finding the right bundle requires no thought at all, Porter and Teisberg recognize that it’s a very complicated problem — and certainly not one that is likely to be solved by a garden variety bureaucracy.

It’s worth remembering that the way health care is bundled and paid for today did not come to us when Moses descended from Mount Sinai. All the bundles we are living with are bundles that either Medicare or some other bureaucracy has chosen.

The need, as Porter and Teisberg pointed out, is to let providers be able to repackage and re-price their services — constantly changing their bundles in response to changes in technology, changes in competing products and changes in consumer demand, the way producers in other markets do.

Instead, all the pilot programs underway are designed to impose a bundling system on doctors and hospitals by some outside organization. And according to another Health Affairs study [gated, but with abstract] by researchers from the Rand Corporation and the Harvard School of Public Health this approach is turning out not to work. (See this Wall Street Journal blog post, as well as my own post.)

Bottom line: There is no question that health care today is bundled inefficiently and the result is wasteful Medicare spending. But as we have argued on more than one occasion, the answer to that problem is to allow every doctor and every hospital to approach Medicare and offer to be paid a different way. (See my study here.) Medicare should be willing to allow providers to repackage and re-price their services so long as Medicare’s costs go down and the quality of care for patients goes up.