Perhaps one of the most fundamental factors to drive care transformation is aligning payment incentives with the behaviors we want to see in care delivery.   Traditionally, physicians and other health care providers have been paid on a “fee for service” model.  Every operation, doctor visit, lab test and x-ray generates a separate payment, rewarding providers for the volume of care rather than the value of the service. Unfortunately, this model has not served us well in health care.  The United States spends the most per capita on health care across all countries but lags behind other high-income countries for life expectancy and many other key outcome measures.  In some cases, our outcomes trail even developing nations. 

The good news is that efforts to move us toward value-driven care have been underway for some time, starting even before the Affordable Care Act authorized new payment and delivery programs. One of these efforts included “bundled payments,” which pay providers for furnishing appropriate services for an entire episode of care rather than on an individual service basis.

Bundling allows us to treat all of the elements of a medical treatment- whether it be a hip replacement, a cancer treatment or a round of dialysis- as a comprehensive intervention with quality standards rather than a laundry list of billing codes.   And it compels the quality and efficiency of care we are seeking in a responsible care delivery system.  If the actual cost of service turns out to be less than the bundled payment, the providers get to keep the difference. But if costs exceed the payment,  the providers have to accept the loss. By marrying cost and quality, we can finally deliver better outcomes for less money.

Nowhere is the need for transformation more pressing than in the treatment of chronically ill patients. The Centers for Disease Control and Prevention estimate that health care costs for chronic disease treatment account for over 75 percent of national health expenditures.

It is no surprise that one of the first areas in which the federal government tested bundled payments was in the treatment of Americans with kidney failure. There are over 26 million Americans battling chronic kidney disease – one of the country’s most devastating and costly chronic illnesses. Americans with kidney failure account for less than one percent of the Medicare population, but are responsible for almost 8 percent of total Medicare spending.

In 2011, with the support of the kidney care community, the federal government dramatically changed how Medicare pays for dialysis. Now, Medicare pays a single rate not just for dialysis, but for nearly all of the ancillary items associated with it, including intravenous drugs and lab tests.  And providers are responsible for maintaining and improving quality in order to receive that payment.

Early results indicate that the bundled payment for dialysis is achieving the outcomes we desire. Patient mortality has improved, hospitalizations have declined and spending has slowed for this medically complex population. It is a practical model for embracing value and eliminating the misaligned incentives of fee for service payment.

But sometimes sound policy goals collide with short-term fiscal decisions. In the recent law averting the last fiscal cliff standoff, Congress required Medicare to reduce reimbursement to dialysis providers to account for the decline in the use of certain dialysis drugs. Pursuant to that change, dialysis providers are now facing a proposed twelve percent reduction in Medicare payment when the program currently pays only 3-4 percent above providers’ costs. Implementation of this proposal would mean that for the first time in the forty years that the federal government has covered Americans on dialysis, Medicare will no longer cover the cost of delivering that care.

It is important that Medicare settle on a fair approach to this first adjustment to the bundled payment system for dialysis.  It serves as an important bellweather for the future of bundled payments as we seek to improve value in the U.S health care system. Missteps could discourage other providers from embracing payment reforms at a time when their partnership is needed to make our transformation a success. 

The path away from business as usual is never an easy one and the desire to cut and shift costs, rather than redesign and improve the system, is often simpler.  But the opportunities of real transformation undoubtedly outweigh the struggle.  Now that we have embarked on the road to improved value, we must ensure that each of our efforts serves as a step in the right direction.  

Daschle, the former Senate Majority Leader, is a senior policy adviser at DLA Piper, which represents clients in the dialysis industry.