Exploring Episode-Based Approaches for Medicare Performance Measurement, Accountability and Payment Final Report. Episodes of Care for Payment


Episodes of care have been used and proposed as a unit of payment for over 25 years; however, such applications have focused on narrow definitions of what constitutes an episode of care and have not considered definitions that more broadly encompass a larger piece of or the entirety of the patient’s care trajectory.  Where episode-based payment approaches have been applied, they either have been limited to single settings (e.g., prospective DRG payments for hospital-based services related to an admission) or were tested within a limited scope of care delivery (e.g., Medicare Participating Heart Bypass Center Demonstration).  

Key payment-related issues that surface in the conceptual discussions of episode-based payments include how to structure an episode-based payment and how to divide an episode-based payment among multiple providers who might be involved in delivering the care.  Within the literature, proposals for structuring payments focus on withholding a portion of payments and adjusting the withheld amount retrospectively based on resource use and quality of care during an episode of care (Davis and Guterman, 2007; Pham and Ginsburg, 2007; Jencks and Dobson, 1985; Welch, 1989; Wennberg et al., 2007) similar to a pay-for-performance (P4P) approach, or alternatively, the payment amount for the episode of care could be set prospectively and adjusted based on the quality of care for the episode.  Although withholds have been used to reward quality performance for discrete services and prospective payment has been used within a narrow DRG episode context (though not linked to quality performance), neither approach has been tested using a broad episode of care construct as the basis. 

The literature also highlighted the challenge of how to divide a payment for a single episode of care, when multiple providers are involved in the management of the episode.  Options discussed in the literature include allowing an entity that has been assigned accountability for the episode to determine their payment arrangements with other participating providers or paying each provider separately by dividing the payment according to a predetermined formula (e.g., based on current Medicare payment rates) (Davis and Guterman, 2007; Network for Regional Healthcare Improvement, 2007) .

Some proposals for episode-based payment reforms in the literature have considered using a “building block” approach.  Such an approach might begin with adjustment of FFS payments (e.g., the application of a P4P financial incentive), which would require relatively minor changes to Medicare policy, then potentially move towards a prospective payment approach for episodes that involves larger reforms and modifications to current payment structures (e.g., Wennberg et al., 2007).  In our discussions, the experts expressed support for such a “building block” approach; however, many stated that significant financial incentives, such as bundled payment, would ultimately be necessary to achieve significant results, although much more difficult to implement.

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