Question

How does bundling payments, like insurance companies paying a per diem rate for all hospital hotel-type services, encourage cost savings on the part of the hospital?

Answer 1

Bundled payments focus on cost effective healthcare. It requires the hospital or provider to assume risk as they must cover the cost above the target price including those for say complications. Thus, the hospital is financially responsible for how efficiently the services are delivered. Let us take an example.

Mary is hospitalized in a hospital that charges $200 per day. Irrespective of the actual costs of treatment, the hospital will receive the same amount for each day she is admitted. Thus, if the actual cost of treatment is below $200 per day, the difference between the actual cost and $200 will be profits for the hospital. On the other hand, if the actual cost of treatment is above $200 per day, the difference will have to be borne by the hospital. This incentivizes the hospital to keep the costs down.