Abstract
A patient-centered approach to defining episodes of care around a hospitalization can provide the basis for creating expanded bundles of services that can be used as the basis of payment. Paying by episodes of care strengthens the incentive to providers to deliver care efficiently. A hospital-based episode of care prospective payment system can be phased in over time by gradually expanding the services and the time period included in the episode. Establishing equitable prospective episode payment amounts requires that the severity of illness of the patient during the hospitalization and the chronic disease burden of the patient be taken into account.