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.