Exploring Episode-Based Approaches for Medicare Performance Measurement, Accountability and Payment Final Report. Types of Episode Constructions that Have Been Proposed for Use


(1) Services Related to a Hospitalization.  Several proposals in the literature have focused on constructing episodes of care related to a hospitalization. The earlier proposals, starting before the implementation of IPPS, focused on payment only. More recently, the proposals have also included a focus on performance measurement. Under current Medicare payment policy, the hospital facility payment covers the hospital's expenditures related to an admission, including hospital-based labor such as nurses, technicians, and housekeeping, laboratory tests, imaging, administration, and capital. The payments are adjusted for service intensity using diagnosis-related groups (DRGs). Outpatient hospital services related to the hospitalization delivered in the three days pre-hospitalization are also bundled into the hospital payment. However, physician services are paid separately, as are all post-discharge services. Medicare measures hospital-level quality indicators, covering the time period of the hospitalization only, through the Hospital Quality Initiative. Here we describe the various alternative bundling approaches that have been proposed, starting with the earliest proposals and concluding with the options most recently considered by MedPAC.

  • Physician DRGs. In the first Senate bill introduced on the IPPS in 1983, the design included bundling physician services provided during an inpatient stay, so that the hospital and attending physician would each receive one payment per discharge (Scott, 1988).  This provision was omitted from the final legislation, but Congress ordered a study of its feasibility (Jencks and Dobson, 1985; Mitchell, 1985; U. S. Office of Technology Assessment, 1986; Mitchell et al., 1987) .  After the feasibility study determined that the financial risk for physicians could be substantial (described below in the discussion of assignment of accountability to individual physicians), the concept was later opposed by the Secretary of Health and Human Services and defeated (Scott, 1988; Welch, 1989) . It was nevertheless the subject of several subsequent analyses (Welch, 1989; Miller and Welch, 1992).
  • Radiology, Anesthesiology and Pathology (RAP) DRGs.  Next, the concept of the Physician DRG was proposed in reduced form: RAP DRGs, which would bundle radiology, anesthesiology, and pathology physician services with the hospital payment.  This proposal was based on the fact that patients do not choose these providers, many of whom have contracts with hospitals (Mitchell and Rosenbach, 1989).  RAP DRGs were first proposed by the Reagan administration in 1987, but the provision was deleted from the Medicare reconciliation bill by the House Ways and Means Committee after extensive lobbying by the American Medical Association and other medical organizations.  The major objections raised were the incentives for skimping on care and the potential adverse effect on the development of new technologies (Hanson, 1987; Scott, 1988) . Estimation of provider financial risk under RAP DRGs using claims data indicated that the level of risk was acceptably low (Mitchell and Rosenbach, 1989).  RAP DRGs were proposed again by the Congressional Budget Office as a deficit-reduction measure for the 1990-94 federal budgets, with estimates of a 1 percent reduction in Medicare spending on physician services (Mitchell and Rosenbach, 1989), but were never enacted.
  • Bundling hospital and post-acute care.  In the 1990s, a bundled payment for hospital and post-acute care was proposed and rejected (Gardner, 1995; Lee et al., 1996; Welch, 1998) .  One feasibility study found that hospital-level financial risk would actually be reduced under this arrangement (Lee et al., 1996), although another study concluded that the hospital financial risk was approximately equal with bundled and unbundled payments (Welch, 1998). Bundling post-acute and inpatient care is part of the possible refinements to the Medicare Acute Care Episode demonstration plan, is currently being considered by MedPAC (MedPAC, 2007c), and has been proposed in several other recent reports from the Commonwealth Fund, among others (Schoen et al, 2007).  The American Geriatrics Society has recommended developing performance measures for transitions of care between acute and post-acute settings (AGS, 2007).
  • Medicare Acute Care Episode Demonstration. Medicare is currently designing a bundled payment demonstration for selected inpatient cardiovascular and orthopedic episodes that would include inpatient services and post-discharge care (Centers for Medicare and Medicaid Services, 2007a) .  Prices for the bundled payment will be established through competitive bidding.  It is not clear how performance measurement will be incorporated in the demonstration design.  Demonstration sites are expected to be announced in the first quarter of 2009 with implementation of the demonstration expected in fall of 2009.
  • Medicare Payment Advisory Commission (MedPAC).  Bundling of physician and hospital payments related to a hospitalization is currently being considered by MedPAC for 10 common DRGs ( MedPAC, 2007a; MedPAC, 2007b; MedPAC, 2007c) .  Preliminary MedPAC analyses found that physician services contribute little to differences in the cost of hospitalization-related episodes.  Costs for imaging and tests were even smaller than those for physician services (MedPAC, 2007c).  The analyses showed that including hospital readmissions and post-acute care in the service bundle would potentially produce greater savings (MedPAC, 2007c).  MedPAC has separately recommended a P4P program that would be expected to complement this.  The measures proposed for use by MedPAC for hospital P4P include the Hospital Quality Initiative measures, risk-adjusted mortality rates for acute myocardial infarction and CABG, NQF endorsed safe practices, and patient experiences with care (Milgate and Cheng, 2006).  These are largely the measures that have been implemented in the Medicare Reporting Hospital Quality Data for Annual Payment Update initiative.

(2) Preventive Care and Primary Care Episodes. Several recent articles included proposals to create episodes of care covering preventive care or primary care only, with specialty physician care, hospital care, ancillaries, etc. excluded, with the episode capturing up to a year of time.  This episode definition has been proposed as a unit for payment and performance measurement for primary care physicians, under which payment levels would be increased over current levels to cover additional coordination activities (Goroll et al., 2007; Network for Regional Healthcare Improvement, 2007; Pham and Ginsburg, 2007 ; Bodenheimer, 2008).  To qualify for the payment, providers may be required to demonstrate that they meet criteria for an "advanced medical home" (Bodenheimer, 2008).

(3) Chronic Care Episodes.  Several articles proposed bundling together services related to the management of chronic conditions, including services provided by the physician managing the condition and possibly diagnostic tests, with general primary care physician services, specialists, hospital care, long-term care, etc. paid separately (Berenson, 2007; Davis and Guterman, 2007; Network for Regional Healthcare Improvement 2007) .  If the chronic condition is managed by a specialist physician, this definition would be very similar to contact capitation.  An existing example is the Medicare payment of physicians for management of end-stage renal disease (ESRD).  Medicare pays a monthly capitation payment to nephrologists who manage ESRD patients, including assessments and planning, monitoring of tests and dialysis, and managing anemia and other secondary conditions (Leavitt, 2008).  Any care provided by the primary care provider or other specialists (e.g. cardiologist) is paid for separately, as is a hospitalization for a complication of dialysis.

(4) Broader Definitions of Episodes. Several articles have proposed using broader definitions of episodes of care to bundle together all services related to a particular condition for the purposes of performance measurement and / or payment (U. S. Office of Technology Assessment, 1986; Davis and Guterman, 2007; Pham and Ginsburg, 2007) .  

One issue in defining these broader episodes is to accurately divide a patient's care into these episodes. For example, a patient with both CAD and diabetes could have a blood test. To which of the two episodes, CAD or diabetes, should that blood test be assigned? Two proprietary episode "grouper" software programs (ETG and MEGS) that bundle claims into episodes based on procedure and/or diagnosis codes have become increasingly popular. However, a recent review found little published literature on the clinical validity of the groupers (McGlynn et al., 2008). CMS has funded a study to study the clinical validity but the study is still ongoing.

Most of the work using these proprietary episode groupers has focused on profiling physicians on their resource use. One study compared Symmetry's Episode Treatment Groups (ETGs), Thomson-Medstat's Medical Episode Groups (MEGs), plus four other groupers for consistency and found "moderate to high" agreement between physician efficiency rankings using the various measures (Thomas et al., 2004). MedPAC has tested ETGs and MEGs on Medicare claims data and recommended using them to provide physicians with reports on resource use as a means to lower use of resources and costs within the Medicare program (MedPAC, 2006). MedPAC's analyses focused on the feasibility of application of the groupers using Medicare data, finding that most Medicare claims could be assigned to episodes, most episodes assigned to physicians, and outliers could be identified. However, each of these steps was sensitive to specifications used. The two groupers were fairly consistent on these measures.

MedPAC has found that costs per episode varied widely for some types of episodes; for example, congestive heart failure and diabetes had twice the cost per episode for ETGs compared to MEGs, highlighting the different approaches to creating episodes taken by the two commercial groupers.  Comparing variation in costs between geographic areas, MedPAC found that using episodes as the unit of analyses (for some episode types) versus annual per-capita costs yielded different results ( MedPAC, 2006).  A qualitative analysis of the use of episode groupers by private health plans for resource use reporting revealed many technical challenges with implementation (Lake et al., 2007).  The technical issues included small episode sample size; difficulty in identifying physicians accurately and consistently using claims identifiers; difficulty aggregating data to practice-level indicators; difficulty in determining which specialties should be held responsible for which episodes; and difficulty in establishing the appropriate comparison groups (Lake et al., 2007).

(5) Prometheus Payment.  An alternative method for defining episodes has been proposed for use in the Prometheus Payment program, and this approach also considers using a building block approach to episode construction with each building block seen as a smaller, self-contained episode. - The program proposes to develop an evidence-informed case rate (ECR), which would be a single, risk-adjusted, prospective (or retrospective) payment given to providers across inpatient and outpatient settings to care for a patient diagnosed with a specific condition--in effect the defined "episode" under this model.  Payment amounts would be based on the resources required to provide care as recommended in well-accepted clinical guidelines.  This model calls for a portion of the payment to be withheld and re-distributed based on provider performance on measures of clinical process, outcomes of care, and patient experience with care received. Ten conditions have been chosen for initial development.28  Some portion of the payment would be bonuses for quality performance using process, outcomes, and patient experience measures (de Brantes and Camillus, 2007).  The data sources include both clinical data and claims analysis.

View full report


"report.pdf" (pdf, 1.02Mb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®