Episode-Based Payments: Finding A New Way to Pay for Quality Care

When looking for ways to pay for quality healthcare, we tend to look at two endpoints. On one end is fee-for-service, which often encourages volume over value and lack of care coordination. On the other end sits full capitation, which could encourage providers to withhold services to maintain profits. So what's in between?

Think episode-based payments.

With this approach, payments would be bundled for all services delivered to a patient for an episode of care for a specific condition for a specific period of time, according to researchers with the Washington-based National Institute for Health Care Reform, which recently released an overview of episode-based payments.

As an example, the care provided to a patient involved in a car accident—from triage in the emergency department through hospitalization, trauma surgery, and rehabilitation—would comprise an episode. Then, in theory, the episode-based payments would provide financial incentives for providers to improve both efficiency and coordination of care.

This concept of episode-based payment is not new, the researchers noted. In the 1990s, Medicare experimented with some form of bundled payment through a demonstration program that combined physician and hospital payments for coronary artery bypass graft (CABG) surgery. The demo produced cost reductions between 12% and 27% among participating hospitals.

Despite the favorable results, Medicare did not expand the bundled payments to other major inpatient episodes until the Acute Care Episode (ACE) demonstration at five hospitals last year. With ACE, the government bundled payments for hospital and physician services for specific episodes of inpatient care for orthopedic and cardiovascular procedures.

So are episode-based payments here to stay? Perhaps, but a number of major issues need to be addressed. Policymakers need to define episodes of care, establish episode based payment rates, identify which providers would receive the episode-based payments, and figure out how they would work with other types of payment reforms.

How payments are designed will depend particularly on providers' willingness and ability to assume “financial risk and accountability for quality performance for episodes of care," the researchers said. Also, it payment structure' will depend on a payers' willingness to delegate risk and accountability.

Also, how a payer will identify those providers responsible for an episode of care will have "important implications for the feasibility and effectiveness of episode based payments," the researchers said.

On one hand, payers could target broader groups of providers with mandatory payment systems—but only if modest financial risk is involved for the provider. Payers also could refine payment structures that place greater financial risk on a group —and then make offers to smaller subgroups of providers who are capable of voluntarily assuming that risk, the researchers suggested.

Probably the simplest approach would involve identifying providers responsible for an episode of care—holding all of those delivering care within an episode jointly responsible for the patient's outcomes. This means payers would continue to pay each provider using fee for service templates but provide bonuses—or repayment of withholds—based on how care was provided for that episode and its quality results.

Attention also would have to be paid on how episode-based payments would interface with new types of care delivery such as accountable care organizations (ACOs). "Although some perceive episode based payment and ACOs as competing payment reforms, pursuing them simultaneously could be viewed as hedging bets on payment reform success," the researchers said.

ACOs and episode based payments could work together, they said. Episodes-based payments could be included in the calculation of total payments per enrollee. This could then be compared to benchmarks to determine rewards or penalties for ACOs.

For the most part, payment reform received a short shrift in the healthcare reform debate. While many questions still surround episode-based payments, they show promise in terms of promoting quality care. Now may be the time to open new horizons on paying for health services.