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Payers, Physicians Exploring Episode-Based Payment System

Butcher, Lola

doi: 10.1097/01.COT.0000356957.98866.b5
Reimbursement Notes

Now that America's fee-for-service payment system has become the favored target for criticism for health care payers and policymakers, the search is on for its successor. One popular candidate: episode-based payment that transforms the way oncologists and other providers are paid for their work.

By paying physicians and hospitals for services rendered, the current system rewards physicians and hospitals for the volume of services they provide rather than the quality of care delivered. Indeed, those who provide unnecessary or even dangerous care stand to earn the most; if a patient's health suffers, more services are needed, prompting another ring of the cash register.

A consensus is emerging that paying providers a single fee for an episode of care—that is, for a package of services related to a diagnosis or for a defined period of time that care is provided—could remove the financial incentive to simply provide more services.

Outside of oncology, episode-based payment is hot.

  • Geisinger Health System in Pennsylvania, one of the most innovative health systems in the nation, is winning much attention for its ProvenCare program, in which Geisinger charges a flat rate for elective cardiac bypass surgery, joint replacements, and other procedures. Begun in 2006, the program has improved patient outcomes while significantly lowering costs.
  • The PROMETHEUS Payment system, using an evidence-informed case rate to pay providers, is being piloted in three markets around the country (see for details; PROMETHEUS is arranged to be an acronym for: Provider payment Reform for Outcomes Margins Evidence Transparency Hassle-reduction Excellence Understandability and Sustainability) The pilots are being supported by the Robert Wood Johnson Foundation through a $6.7 million grant.
  • The Centers for Medicare and Medicaid Services recently launched a three-year demonstration to test the idea of a single payment to physicians and hospitals for certain orthopedic and cardiac “inpatient episodes” as an alternative to fee-for-service payments.

While none of these initiatives involves oncology, UnitedHealth Group, America's largest private payer, started an episode-based pilot for oncology this spring. Lee Newcomer, MD, Senior Vice President-Oncology at UnitedHealth Group, believes the concept holds the promise of improving patient outcomes while controlling cancer care costs (see box):

“I think it is a long-term solution far better than the only one I've seen out there so far, which is just to keep lowering the prices” paid for oncology drugs, Dr. Newcomer said. “That is a lose-lose for everybody.”

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What Is an Episode of Care?

Joseph S. Bailes, MD, Chair of the American Society of Clinical Oncology's Government Relations Council, said ASCO has been evaluating alternative payment options such as episode-based and case rate payment models for several years. The nature of oncology practice, he says, poses some challenges for the concept.

“There is no standard definition of episode of care,” said Dr. Bailes, a former ASCO President who also served as Interim Executive Vice President and CEO. “So when you listen to people talk about it, it means what the person who's talking about it thinks it means.”

Alice G. Gosfield, an attorney who serves as outside counsel for the National Comprehensive Cancer Network, said she agreed. As the chairperson of Prometheus Payment, she champions a case rate payment strategy but believes the future will include multiple pay systems, including fee-for-service for some medical situations.

To date, Prometheus has developed evidence-informed case rates (ECRs) for 12 medical conditions for which evidence-based treatment standards are available. The goal is to eventually develop a few hundred ECRs that would account for the vast majority of health care delivered.

“We think this is ideally suited for oncology,” she said. “I represent lots of oncologists in my law practice, and they would love to do this.”

To work in oncology, however, the Prometheus model requires a claims database that includes cancer staging data, which is not yet available.

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Roll Out Carefully

At the Center for Payment Reform, a coalition of organizations pushing for major changes in the way health care is paid for, founder Robert Galvin, MD, is enthusiastic about episode-based payment but he thinks the concept must be rolled out carefully to sidestep unintended consequences that can come with major change.

While private payers can introduce reforms on their own, Medicare payment reform requires Congressional action. Dr. Galvin wants Congress to set the stage for reform but with a timetable that allows for incremental steps. In the meantime, he believes problems within the fee-for-service system should be addressed.

“As enamored as we all are of new models, I think we would be doing a disservice to not move forward with needed reforms in fee-for-service payments” said Dr. Galvin, Executive Director of Health Services and Chief Medical Officer at General Electric. “So we should improve fee-for-service while waiting for episode-based payment to be worked out.”

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UnitedHealth Pilots Episode Payment for Oncology Care

More than 40 oncology practices have expressed interest in participating in UnitedHealth's experiment with episode-based payment for oncology. Lee N. Newcomer, MD, Senior Vice President-Oncology at UnitedHealth Group, discussed the goals of the pilot with OT:

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What prompted UnitedHealth to start this pilot?

Lee Newcomer, MD: Let's start with where oncology is going if we don't do something different. Right now, Medicare is paying for drugs—at average sales price plus 6%—and most of physician income is being made up by cost-shifting over to private payers, who are paying far more than ASP+6. But all of them, including us, are beginning to head closer and closer to that number. So, for oncologists, it's a pretty grim world, and your income is going to keep going down and keep going down.

The reason that is happening is that nobody is really addressing what the oncologist is prescribing. They are just trying to get the unit cost down lower.



So we wanted to create a program that had two intentions. One is to shift an oncologist's income away from drug sales, so that going forward, income would not be dependent on how much drugs they sold, but rather on how well they took care of the patient. The second thing we wanted to do was create an environment where cancer doctors would learn from each other based on actual performance comparisons.

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How does the program work?

Dr. Newcomer: We are using an episode payment that covers a defined period of time in a cancer patient's treatment. For chemotherapy patients, the episode is usually around six months, but it varies by diagnosis to diagnosis. For a patient with metastatic disease, we pay them in four-month intervals. That means every four months that the patient is receiving therapy of metastatic disease, a new episode payment is triggered.

We ask each medical group to look at about 15 different clinical categories and tell us what the treatment regimen they would use for those patients. They choose their own regimen, and we calculate the amount of money they used to make on drugs from that regimen. So we are basically taking what they got on their fee schedule previously, subtracting the cost of the drugs, and shifting that into what we call an “episode payment” that they will receive the very first day they see the patient.

They still get paid for office visits, as before; the chemotherapy administration fees are still paid as they were before. This one-time episode payment, however, does not change going forward even if drugs change. If a new drug becomes available, the group can switch to that, and we will reimburse that drug, but we will not change the amount of episode payment. If a drug goes generic—therefore, the oncologist will make a lot less money on it than they did before—we also will not change the episode payment.

All the drugs are paid for at cost, so the physician still continues to bill us for drugs but they are reimbursed at a cost basis.

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What happens if the patient's prognosis changes?

Dr. Newcomer: With metastatic disease, the oncologist still gets that four-month episode fee no matter what happens to the patient. Let's say that the patient decides to take a drug holiday. The episode fee is still paid for because you are still taking care of the patient.

If a patient goes into hospice, the episode fee is still paid because there is a lot of work involved in taking care of patients in hospice that previously was not paid for. If you decide the patient is no longer responding to chemo and you are going to go to best supportive care, the episode fee still comes through.

That addresses a major gap in oncology care because the industry does not pay very well for palliative care or for terminal illness care that doesn't get chemotherapy. We should be able to address that with this program.

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How will this affect oncologists' income?

Dr. Newcomer: What we have done basically is say: “Doctor, we are going to keep you whole with today's income. We are not trying to ratchet down your income because you are still going to take home the same amount of income you did before. But we have created a new system now where you are going to treat all your patients with the same clinical condition consistently. And, going forward, the episode payment is going to remain the same, even though the drugs might change. So, you're still going to have the money your practice used to make for taking care of patients, supporting all the good things that you do. That's not going to go away. But you won't have to make your decisions based on what drug is going to give you the best revenues.”

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How large is the pilot?

Dr. Newcomer: We have two groups that are now beginning to set this up with us, and we plan to do about six groups this year.

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How does performance comparison come into play?

Dr. Newcomer: The doctors in this pilot will see other groups' performances. For example, if the first group picks Regimen A to treat colon cancer and the second group picks Regimen B and the third group picks Regimen C, within a couple of years, we are going to have enough data between those three groups to say who is getting the best outcomes and who is doing it for the least amount of money. And we will share that data.

For us, that is far and away the long-term reason why we want to be doing this, because we think we can make some substantial differences in how patients get care.

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Payment Reform: Whom to Watch

Because Medicare is the single biggest payer for health care in America, the future of oncology reimbursement will be determined by federal legislators. While Congress is always a wild card, two organizations are likely to influence Congressional leaders—and therefore influence the future of oncology payment.

Oncologists interested in payment reform should keep their eye on two organizations.

  • In the public sector, the Medicare Payment Advisory Committee (MedPAC), which advises Congress, wants to see an overhaul in the way health care is paid for. An enthusiastic advocate of episode-based payment, MedPAC also wants to see hospitals and physicians incentivized to work more closely together. The key document published to date is MedPAC's June 2008 Report to the Congress, “Reforming the Delivery System,” available online at In its 2009 annual Medicare payment policy report, MedPAC reiterated one of its top priorities: Increase payment for primary care services in a budget-neutral way—suggesting that subspecialists should make less money.
  • In the private sector, the Center for Payment Reform (CPR), founded last year by General Electric and others, is working to coordinate private-sector payment reform initiatives with the proposals coming from the Obama administration and Congressional committees. The Center brings together several organizations that are at the forefront of health care reform, broadly speaking, and payment reform as a key element. Those include: Business, represented by GE, the National Business Coalition on Health, and Pacific Group on Health; Labor, represented by AFL-CIO; Primary Care Advocates, represented by the American Academy of Family Practitioners; Consumers, represented by AARP and the National Partnership for Women and Families; and Hospital Providers, represented by Partners Healthcare in Boston and Catholic Healthcare West in San Francisco.

Notably absent: Anyone who says the current system, which financially rewards medical procedures, subspecialty care, and inpatient care at the expense of primary care and prevention, is acceptable. CPR's founder, Robert Galvin, MD, says the leadership team was chosen specifically for those who envision a transformation ahead. “These are change agents.”

The group is working with state, federal and private payers so that public and private reforms support one another.

Further information is available at

© 2009 Lippincott Williams & Wilkins, Inc.
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