CMS TEAM Model Costs and Reconciliation Explained - Plus 4 Ways to Maximize Financial Performance

Beginning in January 2026, the Centers for Medicare & Medicaid Services (CMS) will launch the Transforming Episode Accountability Model (TEAM)—a mandatory bundled payment initiative that will significantly alter how hospitals are reimbursed for common surgical procedures.

Under the CMS TEAM Model, hospitals will be held financially accountable not only for the surgical encounter itself, but for the full continuum of care delivered during the 30-day post-discharge period. While this model introduces new risk, it also offers an opportunity to enhance financial performance through improved care coordination, cost containment, and quality outcomes.

To succeed under the TEAM, hospital leaders must understand the mechanics behind Medicare’s episode cost calculations, payment reconciliation process, quality adjustments, and risk caps. This guide provides a detailed breakdown of each component, offers a real-world example, and outlines key strategies hospitals can deploy to optimize their performance under the model.

Understanding Episode Cost Calculations Under the CMS TEAM Model: What Counts and What Doesn’t?

Medicare defines a TEAM episode as the surgical hospitalization plus all related Medicare-covered services within 30 days after discharge.

Specific costs included in each episode calculation are:

• Hospital inpatient costs: Medicare DRG payments for the surgery.
• Hospital readmissions within 30 days after discharge.
• Physician and practitioner services (Medicare Part B): Surgeons, anesthesiologists, consulting specialists, and outpatient follow-up visits.
• Post-acute care (PAC): Skilled nursing facility (SNF) stays, inpatient rehabilitation (IRF), home health agency (HHA) visits, and long-term care hospital stays (LTCH).
• Outpatient services: Therapies, labs, imaging, emergency department (ED) visits.
• Durable medical equipment (DME) used during recovery.
• Hospice services initiated within 30 days after discharge.

Unrelated elective procedures and prescription medications covered by Medicare Part D will not be included in each episode calculation.

Example of a Typical TEAM Episode: Lower Extremity Joint Replacement

To provide a clear example of what a typical TEAM episode might look like, consider the following breakdown of Medicare expenditures for a typical joint replacement episode.

Overview of costs included under CMS TEAM:

• Hospital DRG payment: $15,500
• Surgeon and physician fees: $4,500
• Anesthesia services: $1,200
• SNF stay (7–10 days): $6,500
• Home health agency services: $1,500
• Outpatient therapy: $1,000
• Durable medical equipment: $500
• Readmissions and emergency visits: $2,500
• Other outpatient services (labs, imaging): $1,000

Total Medicare spending for episode: $34,200

Now for example, if Medicare’s preset target price for your region is set at $32,000, this represents a spending excess of $2,200, which could create a potential financial penalty.

How Medicare Sets Episode Target Prices for the CMS TEAM Model

For CMS TEAM, target prices will be calculated using historical regional spending patterns. Typically, this is based on three years of prior data. Then, they apply a discount (usually between 1.5% to 3%) to ensure savings for Medicare.

For example:

• Historical regional spending: approximately $33,000 per joint replacement
• CMS discount: 3% applied
• Regional target price: $32,000

In other words, hospitals must outperform regional historical averages to receive their bonus and avoid penalties.

Reconciliation Under the CMS TEAM Model: Calculating Bonuses and Penalties

Every six months, Medicare reconciles cumulative episode costs against cumulative target prices. Then, bonuses and penalties are calculated by:

• If the total Medicare expenditures across episodes exceed the cumulative targets, hospitals must repay Medicare the excess amount.
• If total episode costs are lower, hospitals receive reconciliation bonuses.

For example, consider 200 annual joint replacement episodes:

• Actual spending: 200 episodes × $34,200 = $6,840,000
• Target spending: 200 episodes × $32,000 = $6,400,000
• Difference: $440,000 above target (hospital owes Medicare)

In this case the hospital would owe CMS a penalty since they are well over the target spend for their region.

Conversely, consider the same example, but where we lower spending to 31,500 ($500 under the target spend).

• Actual spending: 200 × $31,500 = $6,300,000
• Below target by: $100,000 (hospital receives bonus)

In this case, the hospital will receive a bonus. Thus, modest per-episode savings can substantially impact annual hospital financial performance, swinging from negative reconciliation payments to positive rewards.

Risk Caps: Limiting Hospital Exposure

The CMS TEAM model also includes specific tracks that limit hospital risk:

• Track 1 (Upside-only): Hospitals receive bonuses if savings are achieved but face no repayment penalties.
• Tracks 2 and 3 (Two-sided risk): Hospitals accept both upside rewards and downside penalties, each capped at fixed percentages (e.g., 20%) of total Medicare episode payments.

For example, if annual Medicare payments total $6,400,000, the maximum annual reconciliation adjustment (bonus or penalty) under a 20% risk arrangement would be capped at $1,280,000. These risk caps incentivize efficiency while safeguarding against catastrophic financial exposure.

Integrating Quality and Outcomes into Payment Calculations

Beyond simple cost comparisons, TEAM reconciliation incorporates hospital performance on defined quality metrics. CMS evaluates hospitals using a set of established clinical and patient-experience measures, such as:

• Hospital readmission rates
• Patient-reported outcome measures (PROMs)
• Complication and infection rates
• Patient experience (HCAHPS)

Hospitals receive scores for these metrics annually. CMS uses these scores to adjust reconciliation payments upward or downward—rewarding high-quality care or penalizing lower-quality outcomes.

Quality Adjustments Explained Simply:

• CMS calculates a composite quality score based on your performance across selected quality measures.
• High-quality scores (strong outcomes and patient satisfaction) can increase your reconciliation bonus or reduce penalties.
• Low-quality scores can reduce your potential bonus or increase your repayment obligation.

Typically, historical CMS programs (like CJR and BPCI Advanced) apply quality adjustments of around ±3% to the overall reconciliation payments. TEAM is expected to follow a similar pattern.

Volume Weighting: How Episode Volume Influences Your Composite Score

To calculate your overall quality composite score, CMS uses a method called “volume weighting”. This means quality scores from procedures performed more frequently have greater influence on your total score.

For example:

• Suppose your hospital performs 150 joint replacements and 50 spinal procedures annually.
• Joint replacements represent 75% of your total TEAM episodes; spinal procedures represent 25%.
• CMS weights your quality scores accordingly—joint replacement quality metrics count three times more heavily than spinal procedures in determining your final composite score.

This approach ensures that high-volume procedures have proportionate influence, reflecting their true impact on hospital quality and cost performance.

Illustrating Quality Adjustment Impacts Clearly (Example)

Consider your hospital’s original reconciliation scenario with 200 episodes at a target of $32,000 each:

• Your actual spending is $31,500 per episode, yielding $100,000 below-target savings.
• Your hospital scores high in quality measures, earning a composite quality adjustment of +2%.
• CMS then applies this 2% upward adjustment to your baseline savings.

With $6,400,000 total target spending, a +2% adjustment is an additional $128,000 (2% of $6,400,000).

Total reconciliation bonus becomes $100,000 (cost savings) + $128,000 (quality adjustment) = $228,000 total bonus.

Conversely, a -2% adjustment due to poor quality would subtract $128,000 from your baseline bonus, reducing your $100,000 savings to -$28,000, meaning you’d no longer receive a bonus and would owe Medicare money.

Thus, even moderate quality adjustments significantly influence financial outcomes.

Strategic Levers to Control Episode Costs Under TEAM

Hospitals can strategically influence several key areas to control spending:

1. Reducing Hospital Complications and Readmissions

• Implement evidence-based protocols for infection prevention, early mobility, pain management, and deep vein thrombosis (DVT) prophylaxis.
• Every prevented complication or readmission (costing roughly $10,000–$14,000 each) directly reduces Medicare spending, significantly affecting reconciliation positively.

2. Optimizing Post-Acute Care

• Prioritize safe discharge home versus SNF or IRF stays; home health ($1,500–$2,000 average) is significantly less expensive than SNFs (~$6,500–$10,000).
• Employ proactive discharge planning, intensive patient education, and caregiver involvement, greatly reducing reliance on high-cost PAC settings.

3. Partnering with High-Value PAC Providers

• Build preferred provider networks with efficient SNFs and rehab providers known for short stays and lower readmission rates.
• Shortening SNF stays by even a few days per patient generates notable cumulative cost reductions across multiple episodes annually.

4. Eliminating Unnecessary Utilization

• Scrutinize inpatient services carefully, avoiding unnecessary specialty consults ($200–$1,000 each) and redundant imaging or lab tests ($300 each).
• Prevent unnecessary emergency department visits ($1,500 average each) through robust patient education and clear outpatient follow-up protocols.

Internal Cost Savings vs. Medicare Spending Reductions

A crucial distinction under TEAM is recognizing internal versus external savings:

• Internal savings (e.g., negotiating lower implant prices or using fewer surgical resources) directly enhance hospital profitability within Medicare’s fixed DRG reimbursement—but these savings do not reduce Medicare’s payments.
• External savings (fewer SNF days, fewer readmissions, fewer outpatient visits) reduce Medicare’s total episode costs directly. These are crucial to achieving favorable reconciliation outcomes.

Hospitals need both types of cost control to succeed—internal efficiency ensures profitability within Medicare’s fixed reimbursement, while external cost reductions secure bonuses or avoid penalties during reconciliation.

Key Takeaways for Hospital Leaders

• Prioritize preventing complications, readmissions, and unnecessary PAC use.
• Invest in high-quality discharge planning and robust patient education.
• Develop partnerships with cost-effective PAC providers.
• Distinguish clearly between internal hospital cost savings and external Medicare spending reductions.
• Consistently monitor and respond to episode cost data proactively.

Conclusion: Navigating Risks and Rewards in TEAM

The CMS TEAM model emphasizes not just cost management but high-quality patient outcomes. To be successful, hospitals must clearly understand how CMS calculates episode costs, sets targets, applies risk caps, and incorporates quality adjustments into reconciliation payments.

We hope this guide has helped you better understand the math behind how the CMS TEAM Model will calculate costs and reconcile payment. Use this to guide your strategy moving forward and if you have any questions, please don’t hesitate to reach out!

Avant-garde Health’s CMS TEAM Model Product

Avant-garde Health has developed a comprehensive TEAM solution tailored to help hospitals navigate the complexities of this new model. Their platform combines advanced analytics, cost benchmarking, and strategic consulting to improve quality performance and maximize savings.

Key features include:

• Identification of clinical variation and cost drivers
• Episode-of-care benchmarking
• Performance monitoring dashboards
• Compliance support for CMS quality measures

By partnering with Avant-garde Health, hospitals gain access to actionable insights that align clinical decision-making with financial performance under the TEAM model.

To learn more about Avant-garde Health’s TEAM solution or schedule a consultation, you can contact us here!