Target Prices and Reconciliation

Episode models look like they reward efficiency. They actually reward performance against a target price, and the two are only loosely related. An efficient hospital given a low target loses money; an average hospital given a generous one profits. Understanding how the target is built is the first thing to learn about any episode model.

What goes into a target price

TEAM participants “will continue to bill Medicare FFS as usual but will receive target prices for included episodes prior to each performance year.” Those targets are “based on all Medicare Parts A & B items and services included in an episode” and are “risk-adjusted based on beneficiary-level and hospital-level factors.”

Three properties matter:

• Prospective. Participants know the target before the year starts, so they can plan against it.
• Comprehensive. All Part A and Part B spending in the episode counts, not just the hospital’s own revenue. This is why an episode program is not a cost-accounting exercise inside one building.
• Risk-adjusted on both patient and hospital factors. Hospital-level adjustment is the acknowledgment that some facilities serve structurally more expensive populations.

The reconciliation sequence

TEAM’s regulation lays out the order of operations, and the order matters because each step changes what the next one operates on:

1. Determine performance year spending using claims available six months after year end.
2. Apply high-cost outlier caps to episode spending.
3. Determine reconciliation target prices from the preliminary targets with specified adjustments.
4. Aggregate target prices across all episodes.
5. Compute the base amount by subtracting actual spending from aggregated targets.
6. Apply the Composite Quality Score adjustment.
7. Apply stop-loss and stop-gain limits.
8. Subtract post-episode spending that exceeds three standard deviations above regional averages.

Step 8 deserves attention. It is an anti-gaming provision: a hospital that shifts cost just past the end of the window does not keep the savings. The design anticipates the most obvious way to beat a fixed window.

The tracks

Track	Who it is for	Gain limit	Loss limit
Track 1	Upside only, first year, or up to three years for safety net hospitals	10 percent	None
Track 2	Safety net and rural hospitals, years 2 through 5	5 percent	5 percent
Track 3	Higher risk and reward, years 1 through 5	20 percent	20 percent

Track 2 is the interesting one. It offers less upside than Track 1 in exchange for accepting downside, which sounds like a bad trade until you notice who it is for. Safety net and rural hospitals get a bounded, symmetric arrangement rather than the full 20 percent exposure of Track 3. The finance course made the general point that the right amount of risk is the amount an organization can absorb without threatening its viability, and Track 2 is that principle written into a federal model.

Worth remembering: the quality adjustment comes before the stop-loss cap, not after. That ordering means quality performance can move a hospital’s result inside the band, but it cannot rescue a hospital whose spending badly exceeded target, because the cap binds afterward. Reading a reconciliation formula in sequence rather than as a list of features is how you find out which lever actually controls the outcome. This is the same discipline the contracting course applied to commercial agreements, and it matters more here because the formula is fixed by regulation and not negotiable.

Key takeaways

• Target prices are prospective, cover all Part A and B episode spending, and are risk-adjusted on patient and hospital factors.
• Reconciliation applies outlier caps, then quality adjustment, then stop-loss and stop-gain limits, in that order.
• Post-episode spending more than three standard deviations above regional averages is subtracted, which blocks cost shifting past the window.
• Track 1 is upside-only at 10 percent, Track 2 is symmetric at 5 percent for safety net and rural hospitals, and Track 3 is symmetric at 20 percent.

Sources

• CMS, Transforming Episode Accountability Model (TEAM) (opens in a new tab)
• 42 CFR 512.550, TEAM reconciliation process (opens in a new tab)
• 42 CFR 512.520, TEAM participation tracks (opens in a new tab)