John T. Bigalke

At a Glance

  • With episode-based  payment (EBP), provider organizations will be responsible for managing a process of adhering to evidence-based practices based on what is done rather than who does it.
  • EBP programs also will require multiple stakeholders to work together in new ways.
  • Hospitals may be offered incentives to provide care based on standards and clinical guidelines applied more broadly in the continuum of care and with different standards than previously used.

As participants in the healthcare reform debate look for ways to reduce U.S. healthcare spending, they cite the financial incentives provided by fee for service (FFS), the predominant payment model in the U.S. healthcare system, as being a key contributor to spending growth. Under FFS, which is based on volume or units of service delivered, "doing more" is rewarded whether or not it contributes to quality. The FFS model results in waste in healthcare delivery and is a contributing factor in the rapid rise of healthcare costs. This issue is compounded by geographic variations that have not been proven to correlate with quality of care.

Many advocates believe that a single-bundled payment system, sometimes called episode-based payment (EBP), would provide incentives for hospitals and physicians to better coordinate care-from preadmission through postdischarge activity-which, in turn, would result in higher-quality outcomes, improved efficiency, and reduced costs. EBP was mentioned by President Obama in his Feb. 24, 2009, address to Congress and has since been a major element in healthcare reform discussions.

Given proposed changes in hospital payments (starting in 2013) to reward the avoidance of readmissions, and Medicare's plans to implement bundled payments to hospitals (starting in 2015) for admissions that result in 20 percent of postacute spending, providers and other stakeholders in the U.S. healthcare delivery and payment system need to understand the rationale, implementation, and impacts of episode-based payments.

Goals: Coordinating Care, Reducing Costs

A major disconnect in FFS's third-party reimbursement model of provider payment is coordination of care: The U.S. healthcare system is expensive, in large measure, because patients' information is not connected and their care is not monitored through the entire system. This disconnect makes it difficult to maintain consistent care quality, minimize duplication, avoid errors, and reduce unnecessary costs that are not consistent with long-term quality outcomes.

EBP, in contrast, encourages coordination of care by bundling all costs across a clinical condition for a defined period of time and for all direct and indirect care settings. A care episode may include several levels and types of providers, and may cross a number of venues, including office, outpatient, hospital, rehabilitation, pharmacy, and home health services. Ideally, global bundling of fees by episodes rewards high-quality, lower-cost providers acting together based on clinical standards for optimal outcomes and efficiency. It is hoped that, in this way, EBP will move the healthcare system from volume-based, fragmented care to patient-focused care that is well coordinated across the care continuum, creating enhanced value that can improve health outcomes and lower costs.

A key feature of EBP is its alignment with evidence-based best practices, including clinical guidelines and quality measures.a Determining the "best treatment" is premised in evidence and does not accept the predispositions of organizations that might otherwise prefer to protect a specific domain of expertise. In EBP, the provider organization is responsible for managing a process of adhering to evidence-based practices based on what is done rather than who does it.

EBP Implementation Issues

One of EBP's challenges is the methodology upon which payments are based: What services are included? Grouping healthcare services into clinically meaningful events (episodes of care) allows healthcare professionals, as aptly expressed by healthcare writer Bill Gillette, to "more precisely analyze patient treatments, evaluate the quality of care delivered, and manage the associated costs."b Many health plans and provider groups use a commercial episode grouper to determine physician resource use.

The grouping process typically includes:c

  • Identifying episodes of care composed of clinically related healthcare claims data (including hospital, physician, pharmacy, laboratory, and other types of services) over a defined period of time
  • Attributing episodes to a physician or group of physicians
  • Comparing the actual costs of episodes with their expected costs for each individual or physician group

Providers and health plans also can use episode groupers in many other ways, such as those mentioned by Gillette in a 2005 article:d

  • To identify and stratify high-risk patients
  • To analyze cost and use of resources
  • To evaluate ROI for disease management programs
  • To compare hospital and physician performance
  • To rate employer groups
  • To develop high-performing tiered networks and clinical centers of excellence
  • To target clinical and financial improvements.

Additional important issues surrounding the design and implementation of an episode-based payment system include how to address outliers in the patient population, how to align individual performance recognition with the episode payment, how much to pay per episode, how to deal with geographic variations, and how to apportion payment among all providers participating in the episode of care, including skilled nursing or home care and patient transfers.

Stakeholder Impacts

Transitioning from FFS to EBP and the organizational structures needed to support bundled payments-including widespread adoption of electronic medical records, a critical tool to connect all parties-will likely require significant investments by providers, health plans, and the government. EBP programs also will require multiple stakeholders to work together in new ways. Episode-based changes to the payment process will have many potential implications for providers, payers, and policymakers that are important to consider.e

Providers. Providers across the spectrum of care will have a financial incentive to collaborate to maintain or improve the health of patients and prevent hospital admissions, but will need to develop methods for determining fair payment to all participants. Hospital providers may be offered incentives to provide care based on standards and clinical guidelines applied more broadly in the continuum of care and with standards different from those previously used.

Payers (health plans, employers). Payers will need a trusted source of data and standards to determine the set of services to include in a defined episode of care and will need to determine how to participate in the episode payment allocation process to ensure that incentives for improved clinical performance and care coordination are given to the right providers. Payers should continue to incorporate and further develop risk stratification methods to account for severity of illness and comorbidities within defined episodes of care. Traditional utilization review metrics and policies would need to be updated to reflect improved care processes and outcomes in addition to efficiency and resource utilization metrics.

Policymakers. The Centers  for Medicare & Medicaid Services (CMS) is conducting pilot programs in episode-bundled payments. Because many health plans make coverage decisions based on CMS practices, CMS may play a key leadership role in understanding episode-based payment and its application to health plan member populations. Policymakers and health services researchers will need to continue to test and improve outcomes measurement and risk-adjustment methodologies. In addition, efforts under way to study the issue of comparative effectiveness also may affect this debate.

 Bundled Payments Hold Consumer Appeal

Consumers have a fundamental stake in any cost reduction that contributes simultaneously to improved care. In a recent survey of healthcare consumers, 73 percent (N = 4,001) of respondents said they are confused about how the healthcare system works and 94 percent believed healthcare costs are a threat to their personal financial security.f In addition, 52 percent of respondents said that more than 50 percent of dollars spent on health care are wasted, and 38 percent graded the performance of the system as D or F.

As consumers assume more financial responsibility for their healthcare purchases, EBP's improvements in coordination of care, simpler and more consistent methods to determine quality of care, and more clear definitions of the cost of care could be highly appealing and enable consumers to be more engaged in the process.

 EBP Expected to Move Forward

Regardless of what happens to current healthcare financing reform initiatives overall, EBP is expected to move forward. Industry stakeholders-including consumers-are key to its design, implementation, adoption, and success. If approached properly, the end result could be well worth the effort and investment. By bundling all related clinical services into a single rate, and establishing fair rates based on the resources required to deliver optimal value (outcomes and efficiency), EBP offers the hope of a mechanism to align payments toward results instead of volume.

John T. Bigalke, FHFMA, CPA, is vice chairman and U.S. industry leader, Health Sciences & Government, Deloitte LLP, Orlando, Fla., and a member of HFMA's Florida Chapter (

Sidebar:Prominent Episode-Based Payment Efforts

Recent demonstration projects provide examples of episode-based payment, as cited in the 2009 Deloitte Center for Health Solutions report Episode-based Payment: Perspectives for Consideration.
Two of the projects are Geisinger ProvenCare and PROMETHEUS Payment®.

Geisinger ProvenCare. An episode-based payment method designed in 2005 by the Geisinger Health System, the ProvenCare project designated all services that should be included in care before, during, and after a coronary artery bypass graft (CABG) procedure, and used that grouping to "bundle" charges for the CABG episode. Before the project, Geisinger was performing all 40 steps for bypass surgery only 59 percent of the time. Since implementation of the project, surgery is canceled if any pre-operative measures have been forgotten. The organization has achieved almost 100 percent compliance on all 40 measures.a

PROMETHEUS Payment®. A values-driven healthcare payment model focused on quality, which resulted from an interdisciplinary collaboration that began in 2004, the PROMETHEUS name derives from an acronym that represents the values of the program: Provider Payment Reform for Outcomes Margins Evidence Transparency Hassle-reduction Excellence Understandability and Sustainability. Payments are based on evidence-based case rates and adherence to clinical protocols; they are shared among all providers. Final payment is withheld until provider performance is scored against the clinical protocol. Each provider is scored 70 percent on his or her own practice and 30 percent on all other providers, thus providing clear incentive for clinical collaboration.

a. Abelson, R., "In Bid for Better Care, Surgery with a Warranty," New York Times, May 17, 2007.


a. Rosenthal, M.B., "Beyond Pay for Performance-Emerging Models of Provider-Payment Reform," New England Journal of Medicine, Sept. 18, 2008, p. 1199.

b. Gillette, B., "Episode Grouping Can Weigh Impact of Health Services on Cost and Quality," Managed Healthcare Executive, September 2005, p. 32.

c. Lake, T., Colby, M., and Peterson, S., Health Plans' Use of Physician Resource Use and Quality Measures, Final Report,
Mathematica Policy Research, Inc., Oct. 24, 2007, p. v.

d. Gillette, B., "Next-Generation Episode Grouping Could Drive Care Quality," Managed Healthcare Executive, October 2005,
p. 32.

e. Episode-Based Payment: Perspectives for Consideration, Deloitte Center for Health Solutions, Sept. 18, 2009.

f. 2009 Survey of Health Care Consumers, Deloitte Center for Health Solutions, May 6, 2009.

Publication Date: Monday, February 01, 2010

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