Capitation or Bundling: There’s Much More to the Story

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Stephanie Kovalick
Chief Strategy Officer & General Manager, Strategy
Sage Growth Partners

There are plenty of reasons why bundled payments and capitation can work together to improve outcomes.

The July-August issue of Harvard Business Review published two articles focused on healthcare payment reform:

How to Pay for Healthcare (Michael E. Porter and Robert S. Kaplan) focuses on the benefits of bundled payments as the primary payment method for healthcare. Porter and Kaplan espouse the benefits of the bundled payment model and suggest that bundles can be developed across the spectrum of care while illustrating how capitation may be a step in the right direction, but still offers the wrong incentives for both cost and outcomes.

The Case for Capitation (Brent C. James, MD and Gregory P. Poulsen) takes a different stance, promoting capitation as the best payment mechanism to truly achieve the goals of lowering the cost of healthcare in the United States while improving outcomes across populations of patients – both healthy and encumbered by disease or illness.

While I imagine the point/counter-point approach was intentional to stir debate, as I read each article it became perfectly clear that it’s not about capitation or bundled payment. Rather, it’s about how these two value-based payment mechanisms can effectively work together to incent all stakeholders to strive toward cost containment and improved outcomes, with the eye toward patient and population health. For that matter, fee for service (FFS) as a payment mechanism can also continue to play a role in future healthcare payment systems.

Porter and Kaplan did a nice job describing how a bundled payment model provides the right incentives to healthcare providers to coordinate and integrate care across the continuum. Investing in more expensive interventions to produce better outcomes and reduce adverse events would be part of the bundle; integrating primary care into the care team helps ensure successful and appropriate transitions of care.

James and Poulsen similarly did a nice job describing how capitation, or population-based payment, provides the right incentives to eliminate or reduce waste in the healthcare systems, lower costs, and improve outcomes. Each payment model can play a role in transforming how healthcare is paid for, and the two can work together to align incentives across the board.

Combining the two payment models—or even three to include FFS payments—makes a lot of sense. A primary care provider should be a guidepost for patients. PCPs ought to be paying attention to the health needs of all of their patients, and taking some ownership of ensuring patients receive the best care—and making sure the patients follow up accordingly.

The PCP wouldn’t, however, be performing coronary artery bypass grafting (CABG), but would refer the patient to the appropriate specialist and trust the specialist is coordinating the care team for that surgical intervention properly. Each of these providers can be incented, through payment models, to coordinate care, pay attention to transitions, ensure post-surgical treatment and care is appropriate, and avoid unnecessary complications. Capitation, in this scenario, as the primary payment mechanism for the primary care provider, with risk sharing on costs outside the PCP office, incents the PCP to think about care outside of his or her office.

The cardiologist or cardiac surgeon in this scenario who works with a bundled payment for a CABG is incented to ensure that surgical event, from pre-op to 90 days post discharge, is executed and managed well with all care transitions are supported. Due to his capitation and risk sharing arrangements, the PCP is also incented to ensure this, so both providers will undoubtedly want to be part of the care and transition teams. They work together.

FFS continues to play a role in the new payment landscape. Lab vendors, anesthesiologists, and hospitals will want to get paid. The PCP and/or the specialist receiving the bundled payment are now responsible for those services. If they don’t perform them themselves, they have to pay the service provider through a claim. To ensure they are financially sound with the capitation, risk sharing, and bundled payment models, the PCP and the specialist will pay close attention to the outside services they bring in for appropriateness, efficacy, and cost.

While both sets of authors made terrific cases for capitation and bundled payments to best serve the goals of reining in healthcare costs and improving outcomes, it’s not a binary choice. Each payment model can provide the right incentives to different stakeholders on a care team, and they can work well together to achieve the ultimate goals.