Emerging models for payment reform, Part 2
Outsourcing and offshoring

Episode-based payments

Episode-based payments “reimburse providers on the basis of expected costs for clinically-defined episodes of care” (to use the definition provided here) Such payments “may also be adjusted for severity of illness and quality performance.” They represent one of the new payment models suggested to contain the cost of services while giving providers financial incentives; however, they are only in early stages of developments and many issues remain to be addressed, “including varying definitions of episodes, methods for calculating and distributing per-episode payments, and data infrastructure needs.”

Salient features of episode-based payments include:

  • Episodes of care are typically identified using computer software programs.
  • Expected costs are defined either using claims data or using expected costs of best practices.
  • The baseline payments may be adjusted depending on “whether care provided during the episode met evidence-based standards and/or whether desired clinical outcomes were achieved.”
  • Different payments are applied for different conditions.

Drawbacks are:

  • Episodes of care have currently been defined for a small number of conditions.
  • “It is unlikely that all patient care can be categorized into meaningful episode types for payment purposes.”
  • It is not clear how payments can be fairly attributed to individual providers for complex episodes of care.

Episode-based payments have been implemented by CMS for its Medicare Heart Bypass Center Demonstration (which operated from 1991 to 1996 and is documented in this 2001 paper in Managed Care Quarterly) as well as the Medicare Acute Care Payment System. It is also been tested by Geisinger Health System in Pennsylvania and also underlies a new system called PROMETHEUS.

Based on those test cases, there is some evidence that episode-based payment may have positive effects on cost savings, although researchers who have studied the beginnings of PROMETHEUS also point out that “the project has faced substantial implementation challenges, and none of the three pilot sites had executed contracts or made bundled payments as of May 2011” (Hussey et al, “The PROMETHEUS Bundled Payment Experiment: Slow Start Shows Problems in Implementing New Payment Models”, Health Affairs, November 2011, available here) due to “the complexity of the payment model and the fact that it builds on the existing FFS payment system.”


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