How Should We Pay for Health Care?

by Michael E. Porter & Robert S. Kaplan

Overview — Improving provider incentives and reimbursement must become a central component in health care reform. Payments need to align with the value delivered to patients: better health outcomes delivered at lower costs. Today, however, deeply‐flawed reimbursement approaches actively discourage providers from delivering value to their patients. In this paper the authors argue that reimbursement through bundled payments is the only approach that aligns providers, payers, and suppliers in a healthy competition to increase patient value. The authors describe the principles of value‐based bundled payments, how such bundles should be constructed, and why they believe this reimbursement method best aligns everyone's interests around value. They show how recent improvements in measuring patient's outcomes and the cost of care are overcoming the past barriers to wider adoption of bundled payments. They conclude by describing how bundled payments can transform competition in health care, and the longer‐term implications for providers, payers, employers, and health care delivery systems. Key concepts include:

A value‐based bundled payment is a single payment for treating a patient with a specific medical condition across a full cycle of care.
A bundled payment should cover all the procedures, tests, drugs, devices, and services during inpatient, outpatient, and rehabilitative care for a patient's medical condition.
The limited adoption of value‐based bundles to date has been caused by today's fragmented structure for delivering healthcare, and inadequate or non‐existent measurement of costs and outcomes at the medical‐condition level.
Recent advances in value‐based healthcare delivery concepts set the stage for much more widespread adoption of value-based bundled payments.

Author Abstract

Improving provider incentives and reimbursement must become a central component in health care reform. Reimbursement through bundled payments -- a single payment that covers all the procedures, tests, drugs, devices, and services during inpatient, outpatient, and rehabilitative care for a patient's medical condition -- is the only approach that aligns providers, payers, and suppliers in a healthy competition to increase patient value. In this article, we articulate the principles of value-based bundled payments, how such bundles should be constructed, and why we believe this reimbursement method best aligns everyone's interests around value. We describe how recent improvements in measuring outcomes and costs have overcome past barriers to wide-scale adoption of bundled payments. We conclude by describing how bundled payments can transform competition in health care and their longer-term implications for providers, payers, employers, and patients.