Alternative Quality Contract in Massachusetts
Financing medical research

More on episode-based payments

Episode-based payments, also called bundled payments, provide “a single payment for all services related to a specific treatment or condition (for example, coronary artery bypass graft surgery or CABG), possibly spanning multiple providers in multiple settings” (as defined here). The motivation, as for just about everything regarding healthcare payment reform, is to provide financial incentives for more effective resource allocation to mitigate inexorably rising healthcare costs, while taking into account risk factors that make some patients more difficult to treat or more expensive to treat than others.

The Health Care Incentives Improvement Institute published an issue brief about the status of episode-based payment implementation in the US, by M. Burns and M. Bailit, who reviewed all 19 of the early bundled-payments arrangements. Three models, launched in 2006, 2007 and 2009, respectively, brought attention to this novel payment approach:

  1. the PROMETHEUS payment model,
  2. the ProvenCare initiative by Geisinger Health System,
  3. the Acute Care Episode Demonstration by CMS [Centers for Medicare and Medicaid Systems].

A subsequent approach, launched by CMS in 2011 and called the Bundled Payments for Care Improvement Initiative, utilizes no fewer than four different models:

  • Inpatient stay only (discounted inpatient prospective payment system)
  • Inpatient stay plus post-discharge services
  • Post-discharge services only
  • Inpatient stay only (prospective set payment)

Conditions being bundled. The top reason for selecting a condition for a bundle payment, according to the study, was the cost of the procedure or the treatment. Ease in defining a bundle also played a role. Interviewees also commented they were likely to follow the lead of CMS in choosing bundles. The most common category of bundles consisted of inpatient procedures, followed by chronic medical conditions, especially diabetes. (While opportunities for cost savings are higher for bundles related to chronic conditions, they are also much more difficult to define.)

Bundle definition. Defining a bundle requires determining the services to be included, the episode time window and patient inclusion/exclusion criteria. This can require a significant amount of effort. Therefore, “[s]ome payers and providers have turned to pre-defined bundles,” especially the ones defined in the PROMETHEUS payment model: “seven chronic condition bundles, three acute medical bundles, five inpatient procedural bundles and six outpatient procedural bundles.” Procedural bundles usually begin 2 to 30 days before the procedure and end 90 to 180 days afterward.

Moreover, “patients with comorbid medical conditions who require significant health care services beyond the bundled condition or procedure are excluded from the bundle.” Other restrictions may be based on the age of the patient. Patients who have gaps in their heath insurance coverage are also commonly excluded from the bundle. A table in  further lists potential elements of an episode payment for major acute care as a function of the episode’s various phases: pre-admission, hospitalization, post-acute care and readmission. That short communication also discusses ways to transition to a full-fledged episode payment system.

Payment types.

Risk-adjusted rates, which vary according to the severity of the patient’s medical condition. For instance, “PROMETHEUS uses a multivariate regression model based on claims data and takes into account patient age, comorbid conditions and patient severity.”

Flat-fee rates, which are the same for all patients. This is less common, but may be justified when the patient mix is relatively homogeneous. Flat-fee rates are also easier to administer.

In both cases, payments can be made prospectively or concurrently. The most common approach is fee-for-service payment with retrospective reconciliation.

Risk arrangements. There are three types of risk arrangement, which progressively increase provider-borne risk to motivate providers to study and change their care processes: (a) shared savings, (b) shared risk and (c) full risk.


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