In this section, we discuss ways that episodes have been used or proposed in the literature as the basis of payment, and how payment reform could be aligned with performance measurement. Episode-based performance measurement does not necessarily need to be linked to payment reform. For example, provider performance on episodes of care could be assessed, including both quality of care and relative resource use, and reported back to providers. Public reporting would add an additional incentive for improvement. However, most episode-based approaches discussed in the literature involve a financial incentive linked to performance on the episode.
Different types of financial incentives have been discussed in the literature, and we classified them into two groups based on how they were structured:
- Retrospective adjustment of FFS payments based on resource use and quality during the episode. Some authors proposed withholding a portion of payments and adjusting the withheld amount retrospectively based on resource use during the episode (Jencks and Dobson, 1985; Welch, 1989; Wennberg et al., 2007) . - The withheld payments would be disbursed at the end of a set time period, adjusted on the basis of performance during the episode (Davis and Guterman, 2007; Pham and Ginsburg, 2007) . Conceptually, this model would be similar to a P4P program with incentives based on episode resource use and/or quality. - For example, providers would receive 95 percent of their current payment rate. At the end of the year, providers would receive the 5 percent of payments withheld, with adjustments made so that providers of lower-resource-use/higher-quality episodes received more than 5 percent and providers of higher-resource-use/lower-quality episodes received less than 5 percent. This type of system would not require that current Medicare payment systems be replaced (MedPAC, 2007c). Savings realized by CMS could be shared with providers to support improvements in the quality of care (Wennberg et al., 2007).
- Prospective payment for the episode. Similar to existing Medicare prospective payment systems, such as the IPPS or the home health prospective payment system (which uses a 60-day episode of care as the unit of service), the payment amount for the episode of care would be set prospectively but could be adjusted based on the quality of care for the episode using a pay-for-performance system.
Retrospective adjustment of FFS payments would require smaller, incremental changes to current policy, whereas prospective payment approaches represent a larger reform. As discussed in the introduction, some proposals in the literature have included a phased or "building block" approach beginning with retrospective adjustment of FFS payments, which would require relatively minor changes to Medicare policy, then potentially moving towards a prospective payment approach (e.g., Wennberg et al., 2007).
One issue that surfaces when considering episode-based payments is how to divide a single episode of care payment, 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). According to proposals in the literature, the first method would provide greater incentives for coordination of care between providers, since they would need to develop formal arrangements with one another (Network for Regional Healthcare Improvement, 2007; Pham and Ginsburg, 2007). Providers could be encouraged to accept payment through an accountable entity through a bonus, with the option to accept lower, separate payments instead (Wennberg et al., 2007; O'Kane et al., 2008).