The Medicare Participating Heart Bypass Center Demonstration was conducted to assess the feasibility and cost effectiveness of a negotiated all-inclusive bundled payment arrangement for coronary artery bypass graft (CABG) surgery while maintaining high quality care. HCFA originally negotiated contracts with four applicants (1991). In 1993 the government expanded the demonstration to include three more participants. The evaluation by Health Economics Research showed that an all-inclusive bundled payment arrangement can provide an incentive to physicians and the hospital to work together to provide services more efficiently, improve quality, and reduce costs. The bundling of the physician and hospital payments did not have a negative impact on the post-discharge health improvements of the demonstration patients.