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The Impact of Bundled Payments on Medicare Spending, Utilization, and Quality in the United States

Location: 67 Metropolitan Statistical Areas across the United States
Research Initiative: Health Care Delivery Initiative
Target Group: 
Health care providers
Intervention Type: 
Health care delivery
AEA RCT Registration Number: 

In an attempt to improve quality and reduce spending, Medicare—public health insurance for the elderly and disabled in the United States—is shifting away from the traditional fee-for-service (FFS) model in favor of alternative payment models. Bundled payments are one of the primary alternative payment models. With bundled payments, Medicare makes a single payment for all services related to a specific episode of care. Researchers will examine the impact of bundled payments on Medicare spending, utilization, and quality of care for knee and hip replacements, two common and expensive medical procedures.

This project is registered on the AEA RCT Registry and clinicaltrials.gov.

Policy Issue 

Traditionally, most Medicare payments have been made under the Fee For Service (FFS) payment system. Under FFS, providers are paid for each service delivered to patients, which may result in the over-provision of care. Capitation—in which providers are paid a fixed amount per patient no matter how many services are delivered—is a natural alternative to FFS. However, there is concern that capitation may result in under-provision of care because providers do not receive additional reimbursement for providing more care even when more care is medically appropriate. Bundled payments are viewed as a middle ground between FFS and capitated reimbursement models. Under the bundled payment program studied, acute care hospitals are made financially responsible for the spending and quality of an entire episode of care, including the initial acute care hospital stay and post-acute care during the recovery period. Hospitals are eligible for reconciliation payment from Medicare if they spend less than the target price for an episode, provided that they meet the quality standards. Conversely, they are responsible for paying the difference if they spend more than the target price. The goal is to encourage appropriate provision of care—and also coordination of care among multiple providers.

Photo: Shutterstock.com

Details of the Intervention 

Researchers are studying a nationwide randomized controlled trial of bundled payments for knee and hip replacements that was designed and launched by the Centers for Medicare and Medicaid Services (CMS) in April 2016 and is expected to last five years. Randomization was conducted at the Metropolitan Statistical Area (MSA) level with 67 MSAs and more than 800 hospitals assigned to the treatment group. Researchers will combine the MSA randomization procedure—designed by CMS—with Medicare claims data to measure outcomes.

Researchers plan to analyze the impact of this bundled payment program on healthcare spending, healthcare utilization and healthcare quality. The goal of the study is to shed light on whether bundling payments incentivize hospitals to spend less—without compromising quality of care—and to learn how integrating financial incentives across multiple providers affects the delivery of medical care.

Results and Policy Lessons 

Research ongoing; results forthcoming.