Results:

Using these criteria, there were 245 types of episodes. In total, spending on these episodes accounted for just over half of Medicare spending for this sample in 2007. The remainder of spending was for physician and outpatient claims not associated with a hospitalization. The top 5 and top 17 episode types accounted for one fourth and one half, respectively, of the costs of the 245 episode types, and three fourths of the spending on these episodes was accounted for by the top 43 conditions. The most expensive condition was osteoarthritis with episodes involving hip or knee replacement. Other high-cost conditions were cardiovascular and hip and leg fractures. Individual cancers were not in the top 17. A cost-distribution analysis for the 17 most expensive episodes shows that the initial inpatient admission accounted for 60% of spending; readmissions related to the same organ system accounted for 23%, separately billed physician service another 10%, and the remainder durable medical equipment and home and hospice care. If Medicare paid a bundled rate to all 245 episodes with caps at the 25th or 50th percentile within each of the hospital referral regions, the annual savings gained from reducing spending to the 25th percentile level would total $29 billion; reducing it to the 50th percentile level would save $15 billion. If rather than episode-based, global payment was patient-based at the level of average spending in the 25th percentile regions, saving would be $35 billion nationally, and if spending were set at the 50th percentile level, the savings would be $18.2 billion nationally.