Episode of Care or Bundled Payments - Health Cost Containment

Updated 1/20/2018

Cost Containment header

The following original NCSL Issue brief has been distributed to legislators and legislative staff across the country.

Episode-of-Care Payments - PDF File   |   

Colorado Supplement: Episode-of-Care Payments - PDF File                                             To read portable document format (.PDF) files, use  Adobe Acrobat Reader.

Cost Containment Strategy and Logic

Episode-based payments are at an early stage of development and use, but interest in them is growing. In contrast to traditional fee-for-service reimbursement where providers are paid separately for each service, an episode-of care payment covers all the care a patient receives in the course of treatment for a specific illness, condition or medical event. Examples of episodes of care for which a single, bundled payment can be made include all physician, inpatient and outpatient care for a knee or hip   replacement, pregnancy and delivery, or heart attack. Savings can be realized in three ways: 1) by negotiating a payment so the total cost will be less than fee-for-service; 2) by agreeing with providers that any savings that arise because total expenditures under episode-of-care payment are less than they would have been under fee-for-service will be shared between the payer and providers; and/or 3) from savings that arise because no additional payments will be made for the cost of treating complications of care, as would normally be the case under fee-for-service.
Episode-of-care payments also are known as case rates, evidence-based case rates, condition-specific capitation and episode-based bundled payments.

Summary of Health Cost Containment and Efficiency Strategies- Brief #3- Episode-of-Care Payments

State/Private Sector Examples  Strategy Description Target of Cost Containment Evidence of Effect on Costs

Maryland, Massachusetts, Minnesota, Arkansas, New York, Oregon and Pennsylvania;

CMS national Bundled Payments Care Improvement program (2,100 facilities by 2015)

A single payment for all care to treat a patient with a specific illness, condition or medial event, as opposed to fee-for-service. Lack of financial incentives for providers to manage the total cost of care for an episode of illness. 
Inefficient, uncoordinated care.
Limited research shows cost savings for some conditions. Payment mechanism is at an early stage of development. 

Bundled Payments Recent Updates & Publications - 2012-2017 (Use as a supplement to the PDF above)

  • HHS under Trump Proposes Eliminating or Changing Mandatory Bundled Payment Programs

The Department of Health and Human Services (HHS) has proposed eliminating mandatory bundled payment in several areas of healthcare including cardiac care and joint replacement, according to a rule title posted Aug. 10, 2017. Few details were known initially about the proposed rule as the only information publicly available is the title, “Cancellation of Advancing Care Coordination through Episode Payment and Cardiac Rehabilitation Incentive Payment Models; Changes to Comprehensive Care for Joint Replacement Payment Model.”  8/14/2017

  • The Rise and Fall of Mandatory Cardiac Bundled Payments - Published by JAMA, January 2018. by Rishi K. Wadhera, MD, MPhil; Robert W. Yeh, MD, MSc; Karen E. Joynt Maddox, MD, MPH

  • Examining the Impact of Bundled Payments Ahead of Expected New CMS Programs - Industry Survey Explores Healthcare Professionals’ Perceptions of Bundled Payments; indicataes that "participation in bundled payments has improved the quality of care, and anticipation and preparation for new programs remains high." – Posted by Archway Health, Boston,  9/19/2017  *NEW*

  • CMS under Obama launches large multi-payer Medicare initiative aimed at improved primary care

New Affordable Care Act initiative, designed to improve quality and cost, gives doctors and patients more control over health care delivery

The Centers for Medicare & Medicaid Services (CMS), on April 11, 2016 "announced its largest-ever initiative to transform and improve how primary care is delivered and paid for in America. The effort, the Comprehensive Primary Care Plus (CPC+) model, will be implemented in up to 20 regions and can accommodate up to 5,000 practices, which would encompass more than 20,000 doctors and clinicians and the 25 million people they serve. The initiative is designed to provide doctors the freedom to care for their patients the way they think will deliver the best outcomes and to pay them for achieving results and improving care." It builds on the Comprehensive Primary Care initiative launched in late 2012. For more information about the CPC+ model, see a fact sheet from CMS. 4/11/2016.

  • Extending participation in the Bundled Payments for Care Improvement initiative - Read the CMS release by Dr. Patrick Conway, Acting Principal Deputy Administrator and Chief Medical Officer; 4/18/2016

  • Second Opinion: The crawling pace of doctor-payment reform. by the Bloomberg View editorial board 4/18/2016

  • Bundled Payments for Care Improvement (BPCI) Initiative: General Information  Beginning in January 2013, the Centers for Medicare & Medicaid Services (CMS) announced the initial health care organizations selected to participate in the Bundled Payments for Care Improvement initiative, an innovative new payment model. Under the Bundled Payments for Care Improvement initiative, organizations will enter into payment arrangements that include financial and performance accountability for episodes of care. These models may lead to higher quality, more coordinated care at a lower cost to Medicare.  Doctors, hospitals, and other health care providers can apply to participate in this new initiative, which will test four different models of paying for services delivered across an “episode of care.”

  • CMS announces additional participants in pilot project to improve care and reduce costs for Medicare - August 13, 2015
    Over 2,100 participants in performance period of Bundled Payments for Care Improvement initiative.  The Centers for Medicare & Medicaid Service (CMS) today announced that over 2,100 acute care hospitals, skilled nursing facilities, physician group practices, long-term care hospitals, inpatient rehabilitation facilities, and home health agencies transitioned from a preparatory period to a risk-bearing implementation period in which they assumed financial risk for episodes of care. The participants include 360 organizations that have entered into agreements with CMS to participate in the Bundled Payments for Care Improvement initiative and an additional 1,755 providers who have partnered with those organizations. CMS defines an episode of care as the set of services provided to treat a clinical condition or procedure, such as a heart bypass surgery or a hip replacement.

For 2016 CSG Lists Health Costs as a Top 5 Issue
"States will continue to experiment with global budgets—for hospitals in Maryland and Medicaid in New York and Rhode Island—and move away from fee-for-service payments—as Arkansas, Minnesota, New York, Oregon and Pennsylvania are trying."

-Published as Top 5 Issues for 2016: HEALTH, by CSG; posted Jan. 4, 2016

Betting Big on Bundled Healthcare Payments - hfm Magazine: January 2016. Are bundled payments part of the key to reducing healthcare costs? The Centers for Medicare & Medicaid Services (CMS) is seeking an answer to this question, making bundled payments for hip and knee replacements mandatory for most providers starting next year in a range of national markets. Earlier this year, CMS released a proposed rule that announced its intention to create a mandatory bundled payment program for hip and knee replacements in a number of randomly selected metropolitan statistical areas (MSAs) around the country. After receiving more than 400 comments, CMS issued its final rule on the Comprehensive Care for Joint Replacement (CJR) initiative on 
Nov. 16. Beginning on April 1, 2016, most healthcare providers in 67 markets nationwide will be required to participate in the CJR initiative.

The History of Bundled Payments

For a number of years, both before and after passage of the Affordable Care Act (ACA) in 2010, CMS has experimented with a range of alternative payment models intended to increase value by lowering the costs and increasing the quality of care. Of particular interest have been payment models that “bundle” the costs for an episode of care. Examples preceding passage of the ACA include the Heart Bypass Demonstration, which spanned 1991-96, and the Acute Care Episode (ACE) Demonstration, which began in 2005 and focused on cardiovascular and orthopedic procedures.

Both demonstration projects suggested the potential for improved value through bundled payments. In a 2012 analysis of CMS’s value-
based demonstration projects, the Congressional Budget Office noted that the Heart Bypass Demonstration was the only one of four projects analyzed that effectively reduced expenditures without affecting the quality of outcomes. A 2013 report on the ACE Demonstration project indicated that most of the five participating sites believed cost savings had been achieved, largely due to successful vendor negotiations and the ability to gain-share with physicians.

More recently, the Center for Medicare and Medicaid Innovation’s Bundled Payment for Care Improvement (BPCI) initiative has encouraged voluntary participation in a number of bundled payment models that were authorized by the ACA. While it is too soon to assess the impact of the BCPI models, early indications suggest that organizations participating in Model 2 bundles (which include the anchor hospitalization, all concurrent professional services, and all other services delivered within a designated episode length of 
30, 60, or 90 days) are improving utilization of lower-cost home health agencies over skilled nursing facilities and are decreasing readmissions (although emergency department visits without a hospitalization may have increased).

Overall, then, CMS experiments with bundled payments indicate that they may be more effective than other value-based experiments that have been tested in reducing expenditures while maintaining the quality of patient outcomes. 
At the same time, there is little evidence that participating organizations have been able to achieve dramatic reductions in expenditures.

CJR: Improvements in the Final Rule

In the evolution of CJR from the proposed rule to the final rule, some significant changes have been made to improve the program for hospitals in the affected MSAs. First, CMS has agreed to risk-
stratify payments for hip replacement bundles depending on whether the patient has a fracture. This is important for at least two reasons.

First, patients with fractures are typically higher-cost cases: Anecdotal evidence from HFMA members whose organizations are participating in the BPCI initiative indicates that a higher-than-expected number of fracture cases can have a significant negative impact on performance against baseline.

Second, CMS had declined to exclude low-volume hospitals from the CJR program. Hip replacement surgeries in lower-volume hospitals will often involve emergency cases, such as a fracture, rather than prescheduled surgeries, so a higher payment rate for fracture cases will help lower-
volume organizations that otherwise may not have the same incentives or ability to devote resources to improving bundled episodes of care.

Other key changes made by CMS in the final rule include:

Reducing hospitals’ exposure to downside risk in the second and third years of the program by lowering “stop loss” limits to 5 percent in year 2 and 10 percent in year 3 Removing a provision from the proposed rule that would have enabled beneficiaries to “opt out” of sharing their data with a CJR hospital (although data on alcohol or substance abuse will not be shared) Committing to make data available on at least a quarterly basis, with a goal of making data available as frequently as monthly if practicable Delaying the start of the first performance year from Jan. 1 to April 1, 2016 Promising to get data to hospitals that make a timely request for such data before the April 1 start date


The value of bundled payments ultimately might lie in a program that combines the potential cost efficiencies of bundled procedures with a focus on better management of the chronic conditions that drive the need for procedures, as well as protocols that determine the appropriateness of the procedure. CMS programs, including CJR, exist in a political climate that is suspicious of any effort to limit access to procedures (whether or not they are in the best interest of the patient) or put restrictions on beneficiaries’ choices. Until these issues can be addressed more directly, we may be unable to realize the full potential of bundled payments.
> James H. Landman, JD, PhD, is director of healthcare finance policy, perspectives and analysis, for HFMA. Publication Date: Friday, January 01, 2016  Source online:  https://www.hfma.org/Content.aspx?id=44823

The Utilization Question

The changes made to CJR in the final rule should help hospitals in the 67 MSAs included in the program. But key questions remain: How effective can CJR, or any bundled payment initiative, be in reducing total costs of care without taking on the question of utilization? To what extent is the need for any bundled procedure being driven by underlying chronic conditions? What structures are in place to determine whether a procedure is the most appropriate course of treatment, or whether more conservative treatment alternatives might achieve the same or better outcomes?

In New Jersey, Horizon Healthcare Services set out to change how health care is delivered. A few years into its initiative, the company runs the largest commercial “Episodes of Care” (specialty value-based) program in the country, and is delivering “impressive results in quality, patient experience and cost reduction.” For 2016, it is expanding to additional episodes in gastroenterology, cardiology, orthopedics, gynecology and oncology.  The current program includes more than 900 physicians and completed more than 12,000 care episodes (when?)– making it the largest commercial bundled payment program in the country. Data on outcomes across 200,000 Horizon Healthcare Services members found significant quality improvements from its collective value-based programs in 2014:

• 6 percent higher rate in improved diabetes control; 3 percent higher rate in cholesterol management; 3 percent higher rate in breast cancer screenings;  8 percent higher rate in colorectal cancer screenings

Results also showed that physicians delivered more active care at a lower cost: • 5 percent lower rate in emergency room visits; 8 percent lower rate in hospital admission; 9 percent lower total cost of care.  > New Jersey example: http://www.hci3.org/wp-content/uploads/2016/02/Horizon-Prometheus-Case-Study-4-Feb-2015.pdf

Many providers say no to bundled-payment test - Modern Healthcare  | August 15, 2015
     As Medicare prepares to require hundreds of hospitals to take bundled payments for some orthopedic surgeries, about two-thirds of the hospitals, medical groups and other providers mulling whether to join the Obama administration's voluntary bundled-payment program said, “No thanks.”
      The Affordable Care Act program known as the Bundled Payments for Care Improvement initiative attracted about 6,900 providers that agreed to formally review how participating would play out for them. The CMS announced in August that 2,100 providers finished that review and entered contracts under which Medicare will bundle the costs of treating various conditions—heart failure, joint replacement, stroke, heart attacks—into a single payment.  Their participation marks a significant spike from the roughly 240 providers that previously entered contracts under the program.

Value-Based Payment – Metrics for Transformation

Health Care Incentives Improvement Institute (HCI3) is involved in helping the public and private sectors in developing and implementing a number of VBP solutions.

  • Public Sector – 
    HCI3 is working on a project led by Brandeis University, to develop an episode system for CMS. This “Grouper”, as it is referred to, will be used for several purposes by Medicare. First, it is intended to inform reports that CMS will issue to physicians everywhere in the country that examines their delivery of health care services, and compares that to their peers. As such, physicians would get a better sense of how many resources are used to manage similar patients and how that resource use consumption compares to what other physicians in other parts of the country are doing. There’s a lot of evidence and research demonstrating large variations in resource use by physicians, and that more resources are not linked to better outcomes. The second purpose is to inform the “Value Modifier”. That’s an index that will determine whether a physician is delivering more or less value compared to peers and would result in physicians getting more or less money depending on their value index in managing Medicare patients. Both of these uses of the “Grouper” are big steps in modifying the current anything goes payment used by CMS for the Medicare program.
  • Private Sector
    HCI3 works with health plans, employers and providers across the country to test, refine, and scale various value-based payment approaches. While much of our work is centered around bundled payments, we also work on pay-for-performance programs. And increasingly we’re researching how to link physician incentives to consumer incentives in order to align both at the point of care. In fact, we’re developing a comprehensive framework called the Improving Incentives framework in which we present the theoretical backbone for physician and consumer incentives, and guide payers, employers and providers to reduce the negative incentives that currently push good people to do bad things.
  • HCI3 is also partnering with innovators to develop operational solutions that break down the current barriers to implementing value-based payment and value-based insurance design. Most health plan claims systems can only handle the most basic of transactions, and value-based payments require more sophisticated techniques. And the innovators we’re working with are developing these more sophisticated solutions.is

Measures and Data Sources

Public Sector Initiatives

Measures: The measures for each of the 3 listed CMMI programs will include:

Number (count) of participating providers/states; Number (count) of beneficiaries affected; and Percentage of beneficiaries affected: the count of beneficiaries covered by the specified initiative divided by total FFS Medicare beneficiaries (percentage assumes 35.9 million FFS Medicare beneficiaries as reported by Kaiser Family Foundation for 2006 (the latest year for which this information is available.) See http://facts.kff.org/chart.aspx?cb=58&sctn=169&ch=1800)

Data Sources: 
The data source for the measures listed above is Catalyst for Payment Reform (CPR). CPR received grants from the Commonwealth Fund and the California HealthCare Foundation (CHCF) to support the development and implementation of a National Scorecard on Payment Reform. The Scorecard will be issued annually beginning in March 2013. The data is collected through a survey of health plans conducted in conjunction with the National Business Coalition on Health using the eValue8 Platform. Estimates of the number of patients affected by the various CPR scorecard initiatives should become available after March 2013. More detailed information regarding this effort and other CPR initiatives can be found at: http://www.catalyzepaymentreform.org/how-we-catalyze/national-scorecard

Private Sector Initiatives

Measures: Percentage of total in-network dollars paid through any bundled payment programs with quality of care components in the past year. Percent of total in-network dollars paid through fully capitated payments with quality of care components in the past year. Percent of total in-network dollars paid through partial or condition-specific capitation programs with quality components in the past year. Percent of total in-network dollars paid through shared risk programs with quality components in the past year. Percent of total in-network dollars paid through fee-for-service (FFS) based shared savings programs with quality components in the past year. Percent of total in-network dollars paid through non-FFS based shared savings programs with quality components in the past year. Percent of total in-network dollars paid through FFS plus Pay for Performance (P4P) programs in the past year. Percent of total dollars paid through other types of P4P incentive programs in the past year. Percent of total dollars paid through any “payment reform programs” in the past year.

Data Sources:  Data will be summarized as reported through the Centers for Medicare and Medicaid Innovation (CMMI) websites. Reported and updated periodically at: http://innovations.cms.gov/initiatives/ and more specifically:

Bundled Payment for Care Improvement - http://www.innovations.cms.gov/initiatives/bundled-payments/index.html  (added 11/2015


The federal BPCI program is summarized by CMS as follows:
  • Centers for Medicare and Medicaid Services (CMS) announces new Oncology Care Model (OCM). According to CMS, "This model aims to provide higher quality, more highly coordinated oncology care at a lower cost to Medicare." February 16, 2015.

  • The Secret Sauce for Orthopedics Bundled Payments SuccessHealth systems and hospitals bracing anxiously for adoption of orthopedics bundled payments should take a close look at Meriter Hospital's success with the value-based payment model. >>>

  • The Fifth National Bundled Payment Summit, www.BundledPaymentSummit.com, took place on June 3 - 5, 2015 Washington, DC.  Another Summit is scheduled for June 2016. The Summits are offered both onsite and live and archived for 6 months over the Internet. [NOTE: This is a commercial event, listed for information only.  It is not sponsored or endorsed by NCSL and advertizes substantial fees for participation.] News Service, 12/15/2014.

  • Uwe Reinhardt Questions Bundled Payment Savings Prospects - A July 2013 Alliance for Health Reform video features Princeton’s Uwe Reinhardt questioning whether bundling payments for medical services might actually lead to higher – not lower – costs. "The ACO's, the accountable care organizations, could create local monopolies that could dictate to you what that bundled price would be, and some of us fear that bundled prices might be even more than what the fee-for-service for that bundle would be today. … You really should align all the payers and say, 'Let us jointly negotiate with the ACOs what those bundles should be so that they cannot divide and rule and sort of make us on the buy side weak."
    FULL TRANSCRIPT Video (2:58)   Read More

  • Bundled Payment: The Quest for Simplicity in Pricing and Tying Payment to Quality - June 11, 2013 | Issue Brief by Robert Wood Johnson.  Local initiatives are showing how new methods for paying for health care can improve quality and control costs. This paper offers four steps that organizations considering a bundled payment pilot should follow.  
         Local initiatives are showing how new methods for paying for health care can improve quality and control costs. One strategy, called bundled payment, assigns a fixed payment to cover a set of services, such as a surgery or a patient’s diabetes care, over a defined time period. Bundled payments encourage providers to manage costs, while meeting standards of high-quality care.
         Though the strategy sounds simple, implementing a different way to pay for care across health systems and communities is a complex undertaking. This brief from Aligning Forces for Quality (AF4Q), the Robert Wood Johnson Foundation’s signature effort to lift the overall quality of health care in targeted communities, examines challenges and shares lessons learned from two AF4Q communities in South Central Pennsylvania and Wisconsin.

  • Bundled Payment in Medicare: Promise, Peril, and Practice - A new report and meeting session by the National Health Policy Forum - April 2012. The Center for Medicare & Medicaid Innovation (CMMI) in the Centers for Medicare & Medicaid Services (CMS) is currently in the process of implementing the Bundled Payments for Care Improvement (BPCI) initiative. Under this initiative, CMMI has received (and continues to receive) applications from eligible participants for four broadly defined bundled payment models that will combine payments for multiple services (depending on the model) during an episode of care. Among the  goals of the BPCI are fostering quality improvement while decreasing the cost of an episode of care, giving providers flexibility to redesign care to meet the needs of their community, and removing barriers and provide opportunity for partnerships among providers and other stakeholders. [9 pp, PDF]

  • Testing PROMETHEUS Payment.  The Health Care Incentives Improvement Institute furthered the development and pilot testing of its Prometheus bundled payment model. Researchers at RAND and the Harvard School of Public Health evaluated the initiative at three pilot sites. Posted Jan. 2014.

  • The PROMETHEUS Bundled Payment Experiment: Slow Start Shows Problems In Implementing New Payment Models- Health Affairs, 11/11.  

About this NCSL project

NCSL’s Health Cost Containment and Efficiency Series describes two dozen alternative policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard Cauchi (Program Director) and Martha King (Group Director) with Ashley Noble providing updated research (2013-present). Barbara Yondorf was lead researcher (2009-2012).

NCSL gratefully acknowledges the financial support for this publication series from 2010-2012 by The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado