Extending the use of episode analytics beyond alternative payment model

March 28, 2018

A study from McKinsey Healthcare Analytics reported payers (and providers) that have dismissed bundled payments or treated it as a narrow part of their strategies may under-appreciate the value of episode analytics in improving core business functions.

Episode-based payment (or bundled payment) has been adopted by a large number of public and private payers over the past five to seven years because it holds the potential to achieve faster and more consistent impact than other alternative payment models.

For example, Horizon Blue Cross reported that its episodes program reduced the hospital readmission rate after hip replacement by 37% and the rate of C-sections among pregnant women by 32%. In Tennessee, episode-based payment lowered the cost of managing asthma exacerbations in the Medicaid population by 9%.

Yet, despite its demonstrated effectiveness, many payers have under-invested in episode analytic capabilities, believing that total-cost-of-care payment models and other strategies eliminate the need to measure performance for clinical episodes of care.

Our perspective (and experience) is to the contrary—we believe that episode analytics are foundational for efforts to improve the quality and efficiency of healthcare, whether in the context of fee-for-service reimbursement, total-cost-of-care models, or other alternative payment approaches.

Furthermore, as the use of episode-based payment has expanded, the analytic capabilities to support it have become more scalable, efficient, and sophisticated. Advances in technical proficiency (e.g., risk adjustment)—enabled by big data, more sophisticated analytical methods, and better visualization technologies—have made episode analytics a more flexible tool and improved the comparisons it can make. These advances have increased the scalability of episode analytics and made it possible to extend the tool’s use to other applications beyond payment.

Below, we summarize recent experience with episode-based payment and then discuss six ways payers—and risk-bearing providers—can use episode analytics for applications other than payment. These additional applications include:

  • Enhancing network design
  • Sharing provider performance transparency
  • Directing efficient referral management
  • Enabling consumer shopping
  • Improving utilization management initiatives
  • Optimizing case management strategies
  • Like episode-based payment, each of these strategies can improve the quality and affordability of healthcare

The concept of payment based on “episodes of care” has been around for decades and has slowly gained traction in the United States. Episode-based payment was initially piloted in the private sector; examples include Geisinger’s ProvenCare bundles and the Prometheus Payment program. Its use increased after the Centers for Medicare and Medicaid Services (CMS) launched the Bundled Payment for Care Improvement (BPCI) initiative and several states instituted multi-health insurer episode programs using State Innovation Model grants.

Ohio has implemented 40+ episodes and has also made public the details behind each episode design. While CMS has currently halted the adoption of mandatory payment models, certain leaders have expressed a willingness to revisit this decision.  Moreover, CMS has confirmed the introduction of a new voluntary payment model, BPCI Advanced, which will qualify as an Advanced Alternative Payment Model under CMS’s Quality Payment Program. This could further fuel the adoption of episode-based payment.

Many early adopters—not just Horizon Blue Cross and Tennessee—are seeing results. Baptist Health System in Texas found that the use of episodes for total joint replacement decreased average post-acute care spending by 27%, largely because of fewer inpatient rehabilitation and skilled nursing facility (SNF) admissions.

At Baptist, spending decreased without any harm to patient outcomes; in fact, there was a slight decline in the readmission rate. After the Arkansas Medicaid program applied the episode construct to the management of attention deficit hyperactivity disorder, average episode costs dropped 22%.

Despite the effectiveness of episode-based payment, some healthcare industry stakeholders have been reluctant to fully embrace the model. Often-cited reasons include:

  • The misperception that the model applies only to acute procedural episodes
  • The experience (now dated) of some industry stakeholders that episodes are complex to design and administer
  • A concern that episode-based payment would conflict with the movement toward capitation or another total-cost-of-care payment model

In reality, episode-based payment approaches have been successfully deployed for a wide range of acute medical, chronic medical, and behavioral health conditions. It’s estimated that the use of episode analytics for payment innovation can result in 6% to 18% savings on an insurer’s total book of business.

Furthermore, improvements in episode analytic capabilities have made possible successful deployments at a scale greater than the number of accountable care organizations (ACOs) would suggest (we estimate that more than 10,000 providers in the United States currently receive episode-based performance reports, compared with fewer than 1,000 ACOs.)

In some cases, episode-based payment has been deployed in concert with total-cost-of-care arrangements—an ACO or primary care group is held responsible for managing a population of patients effectively (including, but not limited to, specialist referrals); the specialists are rewarded for managing an episode of care effectively.

We have found that the efficacy of episode-based payment can be attributed primarily to the approach’s specificity in isolating actionable opportunities for improvement (e.g., decisions about high-tech imaging, treatment substitutions, or sites of care). Not only can such decisions be isolated within an episode of care, they can also be placed in a clinical context that is intuitive to providers and matches what patients experience when they then engage with the healthcare system. As we outline, this advantage can be extended to performance improvement levers beyond incentive design.

While the use of episode analytics continues to accelerate in the context of payment innovation, it seems clear that growth solely along this vector leaves tremendous uncaptured value on the table.

McKinsey & Company has the full report

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