The CFA Perspective

Episode of Care (EOC) and Bundled Pricing:  Baseline EOC Analyses, Part 2

Posted by John Meyer, FACHE

3/2/17 6:00 AM

Episode of Care Part 2 image.jpgIn a previous blog post, we introduced the concept of episodes of care (EOC) and its conceptual and practical application to improving program performance and preparing for value based care.  In preparing for the EOC approach as a precursor to the increasing application of bundled payment for EOC’s, it is vitally important to ascertain your hospital’s relative ability to compete on both price and quality.  Baseline information is required.

While the topic of EOC analytics is complex, this blog presents an example of a simple, baseline analysis of two competing hospitals in a regional marketplace in the Midwest.  The data comes from a proprietary Medicare database and is structured to provide EOC information, by category (our example is coronary artery bypass graft, or CABG, surgery), for a 90-day EOC.  The table, below, contains metrics to compare individual hospital performance against a regional average.  Note that this regional average may or may not eventually equate to the “target price” proposed to be used in the Medicare bundle (should it be implemented), because the target price is an amalgam of both hospital historical costs and regional average costs phased in over time, but we believe it a reasonable surrogate to use to make our point in this discussion.

Comparative Cost Analyses

Setting a bundled price means understanding the total cost of care represented by the defined EOC.  Note that a 90-day bundle includes acute care costs (e.g., index admission, readmission or admission to another acute care facility) as well as significant post-acute care (PAC) costs (e.g., home care, skilled nursing, outpatient care and others).  This time period represents a data challenge to hospitals, as they have not previously had access to PAC or payer data.  Our example illustrates the 80/20 rule – the episode represents about 80% acute care costs and about 20% PAC costs.  Obviously, under this scenario, failure to understand and ultimately control the use of and cost of PAC resources can have a significant negative outcome on financial performance.

Note also that these two example hospitals are relatively low volume cardiac surgery provider


CABG Episode of Care (EOC) Statistical Analysis (90 Days Acute + PAC)

 Metric Regional 
ABC Medical Center % Regional
Medical Center

% Regional

 Total Episodes

  24   21


Total Cost   $999,230   $747,779  

Average Cost/Episode 

$44,794 $41,634 92.90% $35,608


Anchor (Inpatient) Hospital Cost $33,677 $29,224 86.80% $25,886


Non-Anchor Hospital (Inpatient) Cost $5,341 $8,756 163.90% $1,419


Other/Inpatient Hospital $0 $0   $0  
Home Health $1,497 $1,471 98.30 $1,202


Shilled Nursing Facility $2,888 $1,038 35.90% $6,175


Outpatient $1,390 $1,146 82.40% $927


Readmission Rate 22.30% 45.80% 205.40% 19.00%


Average Length of Stay (Days) 10.2 9.8 96.10% 9.5


% with an ER Visit 11.40% 8.30% 72.80% 23.80%


Source: Definitive Healthcare,, 2017. Data: Medicare FFY 2014-2015


EOC Definition

Average (Total) Cost per Episode:   ABC has a total cost per episode lower than the Regional Average, but much higher than its competitor, EFG.  Overall, this is positive and indicates that if, for example, a target price approximates the Regional Average, ABC is in a positive competitive position (and could, for example, share savings).  EFG is in a stronger position.

Anchor (Inpatient) Hospital Cost:  This is the cost associated with the hospital where the patient is first admitted (the “index” admission) and should constitute the majority of the EOC costs.  As in Total Costs above, ABC has a total Anchor Hospital Cost per episode less than the Regional Average cost, but much more than its competitor, EFG.

Non-Anchor Hospital (Inpatient) Cost:  This is cost associated with any other than anchor-hospital inpatient hospitalization during the 90-day episode of care.  In essence, it can be interpreted as a failure of the anchor hospital to successfully solve the patient’s clinical problem in the index admission, as the patient required another hospitalization.  ABC had a significantly higher than Regional Average Non-Anchor Hospital rate ‒ also significantly higher than EFG.  Needs analysis to determine the root cause of why this is happening.

Home Health:  Utilization of home health is important for CABG patient recovery and cost-effective in preventing readmissions.  ABC has an almost “average” rate of Home Health utilization as the Regional Average (98%); while EFG uses Home Health at 80% of the Regional Average.  Is EFG using SNF in lieu of Home Health?  Are their patients more severely ill pre- or post-operatively?

Skilled Nursing Facility:  Patients needing a higher level of post-acute care than home health may go to skilled nursing.  Note that while ABC uses SNF at a much lower level than the Regional Average (36%), EFG uses it at a significantly higher level than average (214%).  Why is SNF utilization so high for EFG?

Outpatient:  Post-surgical outpatient visits, inclusive of outpatient cardiac rehabilitation vists are to be expected after CABG, constituting the smallest portion of the overall Average Cost/EOC (3%).  ABC’s average is lower than the Regional Average; while EFG’s is significantly lower (67%).

Readmission Rate:  This is a critical metric and relates indirectly to quality, but directly to costs.  The rate at ABC is very high (205% of the Regional Average!), while EFG’s is lower at 19%.  This may explain the very high Non-Anchor Hospital (Inpatient) Costs for ABC noted above.

Average Length of Stay:  An important metric, ALOS includes both Anchor and non-Anchor hospital stays during the episode.  The Regional EOC Average of 10.2 days compares with an isolated CABG ALOS in the STS National Database of about 7 days on average, excluding Non-Anchor Hospital factors.  While both hospitals are near the average for ALOS, the high Non-Anchor Hospital rate for ABC indicates that there is room for improvement that could positively impact cost/EOC.

Percentage of EOC Patients Admitted through the Emergency Department:  Regionally, about 11% of CABG cases are admitted through the ED.  ABC has a lower than average rate (8.3%), while EFG has a much higher rate (24%).  Why is this?  Is it representative of a higher readmission rate?  Emergent versus elective admissions raise the cost per episode, as more emergent, more acutely ill patients may negatively impact all applicable metrics.


The above data paint a baseline, summary picture of two hospitals and how each might perform under an EOC payment model.  This is by no means a definitive picture, nor does it address other non-financial performance standards (e.g., HCAHPS scores; all-cause, risk-adjusted mortality rate) that will have to be addressed for successful EOC package pricing.  But it does provide an, all-other-factors-being-equal, snapshot picture, and it raises some important questions that will need to be addressed:

  • ABC hospital should be concerned with its overall performance.
  • On the plus side, its Average Cost/Episode is positive and under the Regional Average.
  • It has real issues with Readmission Rate, Non-Anchor Hospital and PAC Costs, which may be interdependent; its overall ALOS may be being impacted by these issues as well.
  • Without question, there is room for care improvement as well as cost management.


Obviously, our intent here is not to solve these problems, nor to take the necessary “deep-dive” into the analytic data that resides in both hospital and payer databases, but to point out that relevant data must be used to begin to identify issues and point one in the right direction to both pursue more definitive information and ultimately find answers.  Identifying the right problem then must lead to the right solution.  The identification of issues focusing on cost, care coordination, post-acute care patterns, and quality outcomes are critical for prolonged success in a value-based reimbursement world moving towards EOC-centric payment models.  Having access to comparative databases can provide valuable information that will help address these challenges.

If you are interested in learning more about strategies to deal with bundled pricing, EOC analysis, low volume cardiac surgery programs, programmatic consolidation, or other cardiovascular service line concerns, please contact CFA at (949) 443-4005 or by e-mail at