The Episode-Based Benefit Plan: Promoting Episode-Based Provider Payment Through Employee Health Benefit Design – Food, Drugs, Healthcare, Life Sciences


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Executive Summary

Employers sponsoring group health plans face the ever-growing
challenge of rising health care costs, and the increasing expenses
they place on the plans and their enrollees alike. To respond to
these pressures, employers have experimented with a variety of
insurance design options and payment models, to varying degrees of
success, mostly modest. However, research and field implementations
show that episode-based payment arrangements present an opportunity
to stem these rising costs, while increasing the coordination of
care in the fragmented US health care system. In these models,
plans and groups of providers agree to a flat fee for all services
related to a single episode of care. The providers then work within
that budget in a coordinated way to deliver cost-effective and
quality care.

To achieve the full potential of episode-based payments, plans
and providers must align their goals and incentives with those of
the employees (and patients) they serve. The typical
employer-sponsored group health plan design today is not calibrated
to encourage patients to select the highest quality or most
efficient providers, and does not reward patients for selecting a
provider who will deliver care at a single episode-based price.

Employers can design creative cost-sharing frameworks that give
enrollees financial incentives to join with employers and
episode-of-care contracted providers (“EOC contracted
providers”) in promoting the episode-based care model. This
paper describes just such a framework: the Episode-based Benefit

In the Episode-based Benefit Plan, patients are rewarded with
low cost sharing and a predictable price for an entire episode of
care when they select a high-value EOC contracted provider. Their
cost-sharing obligations increase as they move to more expensive
EOC contracted providers. And enrollees who decline to use EOC
contracted providers may face even higher cost-sharing obligations
for the individual services they utilize, some of which might not
accrue toward their annual maximum out-of-pocket cost-sharing
limits. Coupled with strong transparency and patient education
tools, this simple framework of cost sharing can motivate patients
to make wise health care choices that benefit themselves, plans and
providers alike.


Why an Episode-based Benefit Plan?

As health care costs grow nationwide, employers are increasingly
driven to manage these increases through higher employee cost
sharing. Employee out-of-pocket spending for employer-based PPO
coverage increased nearly 70% over the past decade.1
Such high cost sharing presents financial barriers that can lead
patients to forgo both high- and low-value health care.2
Avoidance of necessary and preventive services can, in turn, lead
individuals to experience poorer health outcomes and eventually
require more costly emergency services and inpatient care. Another
means of addressing increasing health care costs is network
restrictions. According to the 2020 Health Care Delivery Survey by
Willis Towers Watson,3 a benefits consultancy, close to
one in five employers had implemented a narrow network in one or
more regions where they have concentrations of employees. These
narrow networks are designed to address the price of care, but not
its utilization and, by their nature, restrict the choice of
providers for plan enrollees.

Bundled programs, or episode-based payment programs, have grown
in popularity as health care payers seek to improve care
coordination while lowering costs and as an alternative to simply
increasing cost sharing or narrowing networks. In contrast to
traditional fee-for-service (FFS) models, where payers make
separate payments for each service a patient receives,
episode-based payments offer providers a single payment to perform
a set of services within defined bundles or episodes. Providers who
have agreed to this predetermined rate accept some financial risk
for the cost of the services and are incentivized to deliver more
efficient care. In 2016, the Center for Medicare and Medicaid
Innovation (CMMI) tested episode-based payment through the
Comprehensive Care for Joint Replacement (CJR) model and found
costs for model participants were about 5% lower than the
baseline.4 The federal government is continuing to build
on this success, announcing its intention to move more patients to
similar accountable care relationships where providers are
“responsible for managing patients’ care and are
accountable for their patients’ costs.”5

However, innovation is needed to fully realize the potential of
episode-based payments and ensure patient access to necessary
services, all the while avoiding unnecessary network restrictions
and high cost-sharing arrangements. To date, the episode-of-care
model has existed largely as an arrangement between plan and
provider. While patients benefit from the improved care
coordination offered by episode-based payments, they rarely share
in their financial benefits. As a result, patients are not
financially motivated to participate in the success of episodes
through provider selection or adherence to treatment
recommendations. Even if they were financially motivated,
oftentimes patients do not have sufficient information readily
available to make an informed choice. Financial barriers to seeking
care can persist as well, with high deductibles presenting barriers
that discourage all patients from seeking needed care, with
disproportionately high adverse impact on racial and ethnic

Studies show financial incentives are most powerful in improving
patient conditions when they target both patients and providers,
rather than one or the other in isolation.7,8,9
Therefore, to maximize the effects of cost sharing on patients’
health and improve the efficiency of care, plans should financially
incentivize patients and providers together to strive toward the
same outcomes. This combination of value-based payments and
value-based insurance design is what has been recently recommended
by VBID Health in a new white paper, “The Essential Role of
Employers in Aligning Plan Design and Payment Reform to Improve
Quality, Enhance Equity, and Promote Value,”10
authored by Drs. Fendrick, Chernew and Levin‑Scherz.

Our Approach

This white paper describes an approach to episode-based payments
for self-funded employers that can remove barriers to high-value
health care by aligning patients’ OOP responsibilities with the
value of a covered episode—for example, lower OOP
responsibility for a chronic condition and higher for an elective
procedure. The Episode-based Benefit Plan could be the sole plan
offering for some or all employees, or it could be one of several
plan choices where the employer prefers that approach. In either
case, the considerations discussed in this white paper envision an
underlying health plan that covers non-episodic care and addresses
many standard plan features, including covered services and network
arrangements. In that context, the Episode-based Benefit Plan
offers cost-sharing options and price and quality transparency
tools for patients, which can together serve as levers to encourage
enrollees to visit providers offering high-value services at a
lower price and discourage low-value care, helping reduce health
care costs while ensuring patients receive the care they need.

The Episode-based Benefit Plan uses cost sharing, price
transparency, and quality measures to align financial incentives
for patients, with the financial arrangements negotiated between
plans and providers. Through the Episode-based Benefit Plan, plan
enrollees are offered a prospectively defined budget for each
episode of care whether offered by an EOC contracted provider who
has agreed to perform all services within the episode at a
predetermined rate or a non-EOC contracted provider whose full
episode price would only be known after the end of the episode. By
reviewing the price of the EOC contracted provider, the member
understands their financial obligations upon selection. Members who
choose to see non-contracted providers for episode-related care
will not have the same price transparency available and will
subject themselves to uncertainty and potentially higher OOP costs.
Further, the Episode-based Benefit Plan is designed to vary based
on the employer’s underlying plan type to maximize
enrollees’ incentives to seek higher-value care and participate
in cost-saving behaviors. Combined with preventive care and
opportunities for wellness benefits, the Episode-based Benefit Plan
is a comprehensive benefit package that encourages enrollees to
affordably and efficiently get the care they need in a manner that
aligns with their employer’s and providers’ financial

The particulars of each employer’s current plan will differ,
and as a result, so too will the final Episode-based Benefit Plan
that it transforms into. This paper provides several options for
employers to address differing needs. In order to illustrate how an
Episode-based Benefit Plan might work, the paper provides a
detailed example of how cost sharing could be tiered in a benefit
plan to incentivize enrollees while also addressing actuarial and
regulatory considerations.

In the example plan, enrollees whose health needs fall into an
episode of care face a tiered cost-sharing model, with rates of
cost sharing increasing as health care costs accumulate. Those
enrollees who select an EOC contracted provider pay coinsurance
based on the fixed price of the episode that is known to them in
advance, and that likely falls into a lower cost-sharing tier.
Consequently, their coinsurance obligation will be less when they
select a lower-cost provider for the episode of care. Meanwhile,
enrollees whose health needs fall into an episode of care and who
do not select EOC contracted providers will be subject to the same
tiers of cost sharing based on the actual accumulated provider
charges (as allowed by the underlying plan) for the individual
services incurred in each tier. As these unpredictable individual
charges accumulate, the enrollee’s cost sharing rises. But the
plan’s liability is capped relative to the price of the episode
at a maximum allowable, with all costs above the maximum allowable
borne by the enrollee, meaning these enrollees could pay a high
out-of-pocket cost for choosing to use a non-EOC contracted

Milliman, an actuarial consulting firm, has used this approach
as the basis for its accompanying actuarial model.

This paper takes into consideration the specific regulatory
constraints placed on self-funded group health plans, mostly under
federal labor, tax and health care regulation. Every employer’s
circumstances may differ, and employers should consult their
advisors to ensure compliance.

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1. NIHCM Foundation (see

2. RAND HIE (see

3. 2020 Health Care Delivery Survey,
Willis Towers Watson (see

4. Lewin Group report on CJR (see
(p. 4).

5. Brooks-LaSure et al. (2021) (see

6. Cole et al. (2020) (see

7. Barankay et al. (2020) (see

8. Wong et al. (2017) (see

9. Asch et al. (2015) (see

10. See

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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