Need for Risk Adjustment in Adapting Episode Grouping Software to Medicare Data

Episode grouper software offers a potential
framework for developing important
components of a pay-for-performance system
for healthcare providers. If the costs for
treating health conditions can be computed,
then policymakers can in principle benchmark
different providers’ cost distributions
and reward the most efficient. This article
applies two of the most prominent commercial
groupers and examines the properties
of the cost distributions calculated for their
constructed episodes. The analysis reveals
that episode cost distributions exhibit substantial
variation and skewness, suggesting
the need for innovative risk adjustment
methods prior to utilizing groupers for the
purpose of physician profiling.