Episode-Based Payments Explained

Episode-based payments, also known as bundled payments, were created by the Center for Medicare and Medicaid (CMS). This type of payment model came about with the Affordable Care Act with the goal of improving patient outcomes at a reduced cost to Medicare.


What is an Episode Based Payment?


Alternative payment models (APMs), designed to improve care and reduce healthcare costs, incentivize providers to deliver high-quality and cost-efficient care to patients. Episode-based payments — also known as bundled payments — qualify as an APM and help move providers away from fee-for-service (FFS). FFS reinforces volume-driven healthcare, while value-based payment models, like episode-based payments, motivate providers to coordinate care. 


With episode-based payments, the total allowable remittance for a patient’s sequence of care related to a single episode or medical event is predetermined, instead of separate compensation for each service and provider along the way. 


Based on the projected costs, an all-inclusive payment gets issued to all healthcare providers and institutions working on the same case, including physicians, hospitals, nurses, medications, medical equipment, post-acute care, and related services. The more successfully or effectively participating providers control healthcare expenses and stay within the budgeted amount, the more they share in potential savings.


Advanced Bundled Payments for Care Improvement


When the government enacted the Affordable Care Act, the Centers for Medicare and Medicaid (CMS) created Bundled Payments for Care Improvement (BPCI). When adopting a bundled payment model, participating providers assume more risk, but also gain opportunities for bigger reward. Bundled payments can result in shared savings or shared losses, depending on the difference between the preset prices and actual costs. The model intends to create a win-win-win — better outcomes for patients, more financial incentive for providers to coordinate care and thereby reduce costs, and fewer overall dollars paid out by CMS. 


In 2018, CMS issued a new iteration of the model, BPCI Advanced. While the new model comprises several differences from the previous version, noteworthy changes include:

  • Reducing the number of selections for inpatient clinical episodes (from 48 to 31), plus a new clinical inpatient episode and three new outpatient bundles
  • Prospectively sets target prices
  • New quality measures across all episodes for participating providers, as well as all downstream providers and suppliers
  • No transition time for assuming financial risk
  • Awareness of overlap with other APMs when analyzing data


Shifting from fee-for-service payments to episode-based payments requires coordination of care across the entire patient episode. Coordinated care ensures providers don’t work in silos and inadvertently drive costs up by ordering duplicate tests or performing unnecessary procedures. Quality coordination lowers costs and ultimately results in better outcomes for patients. 


Aligning Physicians for Coordinated Care, Cost Efficiencies


Inherent to the U.S. healthcare system, the FFS payment model doesn’t encourage or reward provider collaboration. Critical to success when participating in bundled care models, provider teamwork requires new protocols and revised workflows — not only for the direct care provider, but for everyone who contributes or influences the patient care journey.


The growing aging population, with a prevalence of comorbidities and high healthcare utilization, require more complex care. In our fragmented healthcare system, these patients see a wide variety of providers, take multiple medications, require post-acute care and often end up back in the emergency department.


Coordination of care amongst providers and throughout the continuum involves organizing and sharing information about patients’ care. The shared information helps guide timely, safe and effective care, while also keeping costs under control.


In theory, electronic health records (EHRs) should provide all healthcare providers with an easily accessible method for sharing information and communicating throughout the patient journey. According to a survey from the Center for Connected Medicine, close to one-third of hospitals and health systems describe their EHR interoperability as insufficient — even within their own organizations. Utilizing a digital communication platform that augments the EHR helps providers actively engage around care, especially as a patient transitions from acute care to post-acute care.


Strategically Partnering to Manage Post-Acute Care


With bundled payments, the patient’s clinical episode continues for 90 days post-discharge from the triggering event. After transitioning patients to post-acute care, participating providers benefit from partnering with top-quality skilled nursing facilities (SNFs) that can help reduce the length of stay.


Ongoing engagement and care coordination not only increases the quality of care, but also changes the pattern of care. Participating health systems seek post-acute partners who most effectively care for patients, so they can quickly return home. With continued collaboration and integrated analytics, providers can easily identify patients who may be most at risk for rehospitalization, which assists care coordination and mitigates risk. 


Quality of care continues to impact episode-based payment models, as participating systems can incur penalties under the All-Cause Hospital Readmission measure and Advance Care Plan measure. By introducing collaboration platforms, various internal and external care providers can communicate and coordinate care to keep the patient’s best interest at the forefront, and ultimately reduce readmission rates.


Mandatory Episode-Based Payment Models


CMS plans to implement mandatory participation in episode-based payment models in 2024. Future models will likely include learnings from previous bundled payment models and may lead to greater evolution in value-based care. 


Voluntary participation in today’s models gives healthcare systems insight into their ability to control costs and coordinate care along the continuum, and helps identify areas of improvement. Providers must learn how to distinguish and mitigate costs associated with unexpected care and any other costs outside of their control in order to succeed. Episode-based payment models pose other challenges, particularly with data analytics, reporting, and other related infrastructures built into the current healthcare system. 


Participating systems need to find new ways to manage communication amongst all participating providers and entities, while also tracking patients to effectively and efficiently work from shared care plans. To achieve these complex goals, healthcare systems should consider upgrading to integrated, cloud-based technology — shared among all providers and players involved in patient care — that both identifies cost-savings opportunities and facilitates effective provider communication throughout the care continuum so everyone wins.


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Topics: Post-acute, Hospitals, Articles, ACOs, Population Health
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