The unintended consequences of bundled payments.

Consensus is building that episode-based bundled payments can produce substantial Medicare savings, and the Center for Medicare & Medicaid Innovation's Bundled Payment Initiative endorses this concept. The program generates potential cost savings by reducing the historic cost of time-defined episodes of care, provided through a discount. Although bundled payments can reduce waste primarily in the postacute care setting, concerns arise that, in an effort to maintain income levels that are necessary to cover fixed costs, providers may change their behaviors to increase the volume of episodes.

The fixed-cost dilemma: what counts when counting cost-reduction efforts?

The high fixed-cost structure of hospitals and the predominance of "joint costs" mean few truly variable costs can be captured by small or incremental cost reduction strategies. Many of the proxy metrics used to measure cost savings, such as length of stay and readmissions, typically does not reflect true cost savings, but should be seen as measures of additional capacity with the potential for added revenue. To achieve true savings, hospitals should consider reducing capacity when possible and making better use of the remaining capacity, increasing throughput, and reducing costs per discharge.