A lot of pipe dreams have been stoked by the seductive notion of “aligning incentives” — a catchphrase of the managed care era that promised better quality and lower costs in one magical bubble. But the divergent interests of patients, payers, and providers are in reality more likely to collide than align, a circumstance that has consigned most of this well-intentioned abstraction to the recycling bin.

In recent years, this journal has documented an increasingly competitive medical marketplace. While cheered by market fundamentalists, this wave of entrepreneurial enthusiasm has problematic implications for the critical issues of fragmentation of care and perverse incentives to overtreat. The most troubling of these has been the deepening of fault lines between hospitals and physicians.

But the markets have also shown signs of a backlash against the Hobbesian dynamic of each against all. Doctors and hospitals have always had their issues. It is no accident that they are usually paid through separate and distinct kinds of systems in both public and private insurance — except in the alternative universe of integrated delivery organizations.

But they need each other, absolutely and inescapably, and evidence is starting to accumulate that competitive stress and financial pressure may be driving hospitals and doctors into each other’s arms as often as it drives them apart. Employment of physicians by hospitals is increasing rapidly. In some locations physician-hospital organizations have survived after a wave of dissolutions that chilled this hot mid-1990s trend. Joint ventures, too, are reportedly proliferating.

Generalizing about competition and collaboration across diverse markets isn’t likely to be productive. But the Medicare Payment Advisory Commission (MedPAC) seems to have decided that the time is ripe to try to force the issue of alignment. At a March 5 meeting in Washington, D.C., most of the commissioners expressed support for a proposal to recommend to Congress that Medicare launch a program of “bundled payment” to hospitals and physicians jointly for specified episodes of care.

“The two dynamics, competition and collaboration, may not be so separate after all,” said staff analyst Anne Mutti, during a background presentation on hospital-physician relations that focused in particular on the growing use of hospitalists. While collaboration may often serve the purpose of improving quality and care coordination, existing incentives inevitably drive even collaborating providers toward running up volume to maximize receipts.

The first step in MedPAC’s “glide path” toward bundled payment — if the commission votes formally to endorse it and include the recommendation in its June report to Congress — would be a two-year period of confidential information dissemination to hospitals and doctors advising them of how much they are spending now on selected episodes and how their spending compares with that of others. After that, target payments would be established based on benchmarks set by the costs of efficient providers. Eventually, payments to low-cost providers would be increased and high-cost providers would be penalized. Meanwhile, doctors and hospitals would have no choice but to learn to work more closely together.

The commission’s discussions about bundled payment go back quite a few years. In the past, design and implementation difficulties have appeared to be prohibitive. The current proposal, for example, bundles payment only to hospitals and inpatient doctors. If, as suggested, episode windows of thirty days are constructed that also include outpatient care, wouldn’t some patient outcomes be attributable to follow-up outpatient care from a primary care or sub-acute provider?

The commissioners wrestled with this and other thorny questions at their recent meeting, and a few of them did not appear to be on board with the consensus. Alternative approaches might include tracking preventable rehospitalizations as an index of quality at the episode level. But most of the commissioners seemed to agree with vice chair Bob Reischauer’s view that “we’re headed very much in the right direction here.”

Improved risk-adjustment techniques seem to have helped set the stage. Private payers’ experiments with case rates and Medicare’s group practice demonstration are also adding to a foundation of experience. Gradually increasing use of health information technology and IT exchange arrangements among providers may also support new payment approaches. The commission has also discussed the empirical work of Dartmouth’s Elliott Fisher and colleagues on the “extended medical staff,” which shows the extent to which community physicians tend to use the same hospitals, creating a potential platform for collaboration and accountability. Sophisticated private payers also recognize the need for payment schemes that mitigate incentives to increase volume of services whenever possible.

Stakeholder resistance is inevitably the biggest barrier to health system change. In any scheme to save money, there will be losers. There will be no transcripts of the lobbying visits that are likely to decide the fate of the bundling proposal. But there’s nothing like a MedPAC meeting to show that sometimes the taxpayers really do get their money’s worth.

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