The Potential for Cost Savings Through Bundled Episode Payments

Study Questions:

What is the estimated cost savings associated with episode-based and patient-based bundled payments, as proposed in the Affordable Care Act?


For episode-based payments, the authors selected a random 5% of the elderly population in fee-for-service Medicare in 2007 and assigned a diagnosis (episode) for every hospital admission that fit 1 of 285 categories. A new event or episode was defined as not having occurred in the past 6 months, and a readmission within 2 months would be part of the same episode. All inpatient and outpatient spending for the same organ system occurring within 180 days of the episode was bundled.


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.


It is possible to achieve very substantial health care savings by moving from a fee-for-service model to bundled payments for episodes of care, whether in a stand-alone program or as a component of an overall global-payment model.


Episode-based bundled payments are easier for individuals and groups of physicians. But bundling payments for care episodes does not provide incentives to reduce the number of episodes. If limiting the number of episodes of care is a major consideration in reducing costs, bundling care at the patient level would be preferred.

Keywords: Motivation, Neoplasms, Fee-for-Service Plans, Hospice Care, Costs and Cost Analysis, Cost Savings, Episode of Care, Patient Protection and Affordable Care Act, Durable Medical Equipment, Health Expenditures, Osteoarthritis, Medicare, Hospitalization, United States

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