The Case for Bundled Payments

John McCracken, PhD

By rewarding the quantity, but not the quality or efficiency, of medical care, the fee-for-service model is widely recognized as perhaps the single biggest obstacle to reducing costs and improving the quality of care.  The alternative, increasingly pushed by both public and private payers, is paying providers for measurable patient value as opposed to volume.

Value-based reimbursement encompasses two radically different payment approaches: the population health  model and the bundled payment model.  In a population health model, the healthcare organization receives a predetermined fixed annual payment for covering all the medical needs of a broad population.  In contrast, in a bundled payment model, providers are paid for the care of an individual patient’s specific condition across the entire episode of care. 

The Population Health Model

In the population health model, the care organization earns bonuses or penalties based on the total cost of care during the year for providing all the medical needs of a defined population.  Cost management entails population-level initiatives that impose limits on generic high-cost areas, including reducing ER visits, limiting the number and duration of hospital stays, and restricting the use of expensive tests and drugs.   Likewise, provider accountability for quality is measured in broad, population-based metrics, such as process compliance, overall patient satisfaction, and population-level outcomes such as readmission rates and complications. 

The problem is that these measures put the focus on limiting the overall amount of care delivered and not on better or more efficient care for a patient’s particular condition.  It also shifts actuarial risk—the risk for the cost of a population’s overall medical needs—to providers, who are neither equipped nor capitalized to bear it.  Finally, population health models encourage or require patients to use in-house providers for all services, even if out-of-network providers have greater experience and better results in treating a particular condition.  In effect, a population health model creates a monopoly provider for all the patients in the population and encourages the emergence of a few large, dominant systems, which then have the incentive to use their market power to restrict competition and raise prices.  The bottom line is that population-based payment models restrict patient choice and fail to reward providers for what matters most to patients—the quality and efficiency of treatment for their individual medical condition. 

The Bundled Payment Model

In the bundled payment model, the payer establishes a total budget for all care services provided to an individual beneficiary throughout a defined episode of care. If the episode’s total spending on services across multiple care delivery settings is below budget, the providers share in the savings; if the costs exceed the budget, the providers bear the losses.  This payment model is rapidly increasing in popularity; as of July 2018, Medicare’s Bundled Payment for Care Improvement initiative had over 1,025 provider organizations participating in 48 different episode bundles. 

The strength of the bundled payment model is that payment is tied to what matters most to patients— the quality and efficiency of care provided for their individual condition. A bundled payment model rewards providers for how well they manage care resources and total costs throughout each episode of care.  This in turn incentivizes a focus on coordination across all the care settings involved in an episode and the measurement and reporting of costs and outcomes at the condition level, where it matters most. 

A second benefit is that the bundled payment model doesn’t lock patients into a monopoly provider network.  To the contrary, it allows patients to choose provider teams that can deliver the best value, wherever they are located and irrespective of their network affiliation.  Finally, it relieves providers of population-level actuarial risk and exposes them only to clinical risk, which they are much more capable of managing. 

Critics of bundled payments are concerned about providers’ incentive to cherry-pick the easiest and healthiest patients and avoid difficult, potentially costly cases.  But risk adjustment for a well-defined episode is much less challenging than it is for a diverse population with high turnover.  Moreover, stop-loss insurance is available to limit the provider team’s risk exposure to high-cost outliers. 

Population health and bundled payment models can easily coexist side by side within the same organization. Health systems that have adopted population-based payment models are discovering that it is often advantageous to use condition-based bundled payments to pay provider subunits for the care and management of select high-cost conditions (although this may create a situation of patient monopoly lock as described above).  While not all conditions are amenable to bundled payments, a subset of both chronic and acute conditions that can be bundled constitute a large proportion of healthcare costs. 


Employer-sponsored insurance covers over 157 million Americans and is a potent force for shifting healthcare reimbursement to value-based payment models.  For employers, managing population costs is not nearly as important as addressing the relatively small number of expensive cases that represent most of their costs.  Employers seek spend predictability and are increasingly contracting with providers in select markets using bundled payment arrangements to provide care for employees with diabetes, hip and knee replacements, and lower back pain.

Making providers responsible for the overall health of a given population might seem to be a simple, straightforward solution, but given a heterogeneous population subject to constant turnover, risk adjustment is actually more difficult than it is for a known condition.  And given that socioeconomic factors are often a more important determinant of overall population health than medical care, providers who accept responsibility for population health have only limited control over what they are held accountable for.  Bundled payments, in contrast, focus on what matters most to patients, delivering value for their specific condition through the entire episode of care.

John McCracken is Director of the Alliance for Physician Leadership, an educational partnership between the University of Texas at Dallas and The University of Texas Southwestern Medical Center which offers an MS/MBA program in healthcare leadership and management exclusively for physicians.