Episodes of care: A new direction for payment models?

The final rule for implementation of the Medicare and CHIP Reauthorization Act (MACRA) legislation has shifted the focus of health measurement and payment.  In a value-driven payment environment, the nature of the patient’s health condition is becoming as important as the services delivered.  New models for payment and healthcare outcome assessment are proposed that will look at the episode of the patient’s health condition as a key driver in establishing incentives for value and moving away from a pure fee-for-service model. 

What’s an episode?

Stedman’s Dictionary defines an “episode of care”[1] as: “All services provided to a patient with a medical problem within a specific period of time across a continuum of care in an integrated system.”  There are a number of payment models that are based on the concept of the “episode”, but all lack the all-encompassing nature of this definition for any disease process.  DRGs represent an episode of a hospital stay but do not include all services outside the confines of the hospital based payment system.  The current bundled payment models represent a more recent type of episode, but are still generally focused on a hospital based event. 

The challenge

Public and private methodologies used to define episodes that may be implemented in current and proposed alternative payment models face significant challenges that will need to be addressed in order to provide a solution that is meaningful to stakeholders and provides a tool for understanding health care value.    Addressing these challenges will require that certain requirements are met.

  1. Definition of episodes:
    • The definition of the episode must be clear and transparent to assure that codes and other data parameters used to create the episode data are clinically meaningful
  2. Attribution:
    • Data must be accurate, specific and sufficiently complete to assure that the right services, costs, persons and providers are attributed to the intended episode instance and that data related to episodes is not over or under counted.
  3. Risk adjustment:
    • Risk adjustment should be sufficiently granular to assure that the clinical and financial risks of the episode are appropriately considered.
  4. Data quality:
    • A clear understanding of the quality of reported data including diagnostic and service codes must be factored into the assumptions used in the application of episodes for analytic and payment purposes.


While there are significant challenges, the concept of risk adjusted, value-based payment is critically important to improving healthcare delivery.  Simplification and clarification of the definition of episodes will be needed to assure reaching that goal in a way that makes sense to all stakeholders.

About the author: Dr. Nichols is a board certified orthopedic surgeon. After 16 years in active practice, he has been involved in healthcare IT for the past 18 years.  On behalf of CMS, payers, providers and other healthcare entities, Joe presents on healthcare data, ICD-10 and clinical documentation improvement.  He is also an AHIMA-approved ICD-10 coding trainer.



¹ http://www.medilexicon.com/medicaldictionary.php?t=29899