The Business of Healthcare: The Role of Physician Integration in Bundled Payments
36 Pages Posted: 10 Mar 2020
Date Written: February 17, 2020
Under the prevailing fee-for-service payments (FFS), hospitals receive a fixed payment, while physicians receive separate fees for each treatment or procedure performed for a given diagnosis. Incentives of hospitals and physicians are therefore misaligned under FFS, leading to large inefficiencies. Bundled payments (BP), an alternative to FFS unifying payments to the hospital and physicians, are expected to encourage care coordination and reduce ever increasing healthcare costs. However, as hospitals differ in their relationships with physicians in influencing care (level of physician integration), the expected effects of bundling in hospital systems with varying level of physician integration remains unclear. To fill this gap, we formulate game-theoretic models to study (1) the impact of the level of integration between the hospital and physicians in the uptake of BP, (2) the consequences of bundling with respect to overall care quality and costs/savings across the spectrum of integration levels. We find that (1) hospitals with low to moderate levels of physician integration are more likely to bundle as compared with hospitals with high physician integration; (2) to engage physicians, hospitals need to gainshare savings with physicians, a mechanism that was not available in traditional FFS-based payment models; (3) when feasible, BP is expected to reduce care intensity, and this reduction in care intensity is expected to result in quality improvement and cost savings in hospital systems with low to moderate level of physician integration; (4) however, when bundling happens in hospital systems with relatively higher level of physician integration, BP may lead to underprovision of care and ultimately quality reduction, and (5) in an environment where hospitals are also held accountable for quality, the incentives for bundling will be higher for involved parties, yet quality vulnerabilities due to bundling can be exacerbated. Our findings have important managerial implications for policy-makers and payers such as CMS, and hospitals: (1) policy makers and payers should be aware of and account for potential negative effects of current BP design on a subset of hospital systems, including a possible quality reduction, and (2) in deciding whether to enroll in BP, hospitals should consider their level of physician integration and possible implications for quality. Based on our findings, we expect that a widespread use of BP may trigger further market concentration via hospital mergers or service-line closures.
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