American health care is caught in a vise, squeezed from the positive gains in life expectancy on one side and unsustainable medical costs on the other. Meanwhile, the pace of improvement in health care quality is painfully slow. Our broken system is far from fixed – and how we pay for care is at the heart of the country’s struggle for real reform, contend Michael E. Porter and Robert S. Kaplan, Harvard Business School professors and renowned authorities on solving the cost crisis in health care.

Fee-for-service – the dominant payment model in the U.S. and many other countries – is now widely recognized as perhaps the single biggest obstacle to improving health care delivery, the expert duo explains in a significant, just-published Harvard Business Review article. “We need a better way to pay for health care, one that rewards providers for delivering superior value to patients: that is, for achieving better health outcomes at lower cost.”

The good news is the move toward value-based reimbursement is accelerating. But now a battle between two radically different payment approaches is raging: capitation, or population-based payment, versus bundled payment, where providers are reimbursed a set fee for an episode of care. Neither is a new idea, nor are Porter and Kaplan the first advocates for the latter. But the stakes have never been higher, they explain. “The outcome will define the shape of the health care system for many years to come, for better or for worse.”

In “How to Pay for Health Care,” Porter and Kaplan – the world’s foremost experts on competitive strategy and performance and cost management systems, respectively – carefully frame their case for bundled payments, a system they believe will finally unleash a new kind of competition and unlock the restructuring of health care delivery in three crucial ways.

  1. Integrated, multidisciplinary care. Providers with overall responsibility for the full care cycle of a condition will be empowered to coordinate and integrate all the specialists and facilities involved in care, triggering a whole new level of care innovation.
  2. Accountability for outcomes, which will finally bring to health care the systematic measurement of outcomes at the condition level – where it matters most. We know from other fields, this is the most powerful driver of innovation and continuous improvement.
  3. Cost reduction. The authors’ research suggests savings of 20-30% are feasible in many conditions. And because bundled payments are contingent on good outcomes, the right kind of cost reduction takes place, not cost cutting at the expense of quality.

The time has come to change the way we pay for health care, in the U.S. and around the world. “Much remains to be done to put bundled payments into widespread practice,” acknowledge Porter and Kaplan. “But the barriers are rapidly being overcome. Bundled payments are the only true value-based payment model for health care. The time is now.”