Provider Payment Provider Payment SystemsSystems

Senior Policy SeminarSenior Policy Seminar

Bangkok, ThailandBangkok, Thailand

February 28 – March 1, 2007February 28 – March 1, 2007

George SchieberHealth Policy AdvisorHuman Development Network

Key MessagesKey Messages

1. There is no ‘right’ method2. Provider payment systems must be tailored to

the institutional realities of each system encompassing both the demand and supply sides

3. Policy-makers need to be concerned about effects across different provider types, different payors (i.e., public, private HI, OOP) as well as overall health spending

4. Policy-makers must monitor the effects of alternative provider payment systems on cost, access, and quality – MIS is critical

Thailand Financing SystemThailand Financing System

Source: Tangcharoensathein and Pitayarangsarit, 2003, Wibulpolprasert, 2007.

Provider Payment in UCProvider Payment in UC

Source: Jongudomsuk

Organization of PresentationOrganization of Presentation

• Definition, importance, and goals• What do we mean by efficiency?• Where do we start – National Health Accounts?• Some observations from a big spender -- the

United States• Development of payment systems --physicians,

hospitals, managed care, pharmaceuticals• Implementation issues• Annex – Case mix based hospital payments

Definitions, Importance, and Definitions, Importance, and Goals of Provider Payment Goals of Provider Payment

SystemsSystems

Objectives of Health ReformObjectives of Health Reform

• Improve health status of population• Enhance equity and access• Assure financial protection• Increase macroeconomic and

microeconomic efficiency• Strengthen clinical effectiveness• Improve quality of care and consumer

satisfaction

Assumptions of a Perfect MarketAssumptions of a Perfect Market

• Perfect information• Free entry and exit• Homogenous product• Independence of consumers and producers• No public or merit goods• Large numbers of consumer and producers - each

with no power of price

Why Public Intervention?Why Public Intervention?

• Health services with collective benefits (public versus personal health services);

• Redistribution/Equity;

• Health insurance market failures; and

• Other market failures in the direct consumption and provision of health services.

Provider Payment DefinedProvider Payment Defined• Mechanisms used to ‘pay’ medical care

providers/organizations for services rendered to their clients

• Developing, testing, and implementing new methods to pay medical care providers (e.g, global budgets, capitation, DRGs, etc.) including MIS and QA systems

• Implementing new systems in which:– money follows patients

– finance is separated from provision

– payment systems contain incentives for access, efficiency, and quality for public and private providers

The ‘New’ Focus – P4P – Pay for The ‘New’ Focus – P4P – Pay for PerformancePerformance

• “Realigning payment incentive in health care to encourage higher quality and more efficient care” (Epstein, NEJM, Feb,2007)

• “Transfer of money or material goods conditioned on taking measurable actions or achieving a predetermined performance target” (Eichler, CDG, 2006)

• In 2005 U.S. Congress mandated that CMS put develop a P4P program for Medicare

• British have implemented P4P with FPs• Is this anything really new or does it just more directly

address the tradeoffs between cost, quality, and access?• Can be applied at system wide to individual

organizational levels

Basic Principles of P4PBasic Principles of P4P

• Increase efficiency in the provision of existing levels of activity

• Where needed, encourage expansion of activity• Enhance patient choice• Increase patient satisfaction• Encourage providers to be responsive to patient and

commissioner preferences• Keep costs under control• Channel funding where it is most needed• Introduce fairness and transparency in funding providers• Encourage the development of new, cost-effective

treatment pathways• Shift patterns of service provision away from historical

patterns• Improve quality

Source: Moraldo, Goddard, and Smith, York CHE Research Paper 19, 2006. Authors use the term PbR – pay by results

Some Basic Measures for Family Some Basic Measures for Family PhysiciansPhysicians

• Utilization and cost management - avg number of emergency dept visits per patient per year

• Clinical quality/effectiveness – % of asthma patients on controlled medications

• Patient satisfaction -- % of patients who would recommend their physician to a friend/relative

• Administrative – practices level of information technology

• Patient safety -- % of patients questioned about allergic drug reactions

Source: Millenson, NEJM, Feb, 2007.

Focus on HNP results (outcomes/outputs) – Focus on HNP results (outcomes/outputs) – Paying for results in ArgentinaPaying for results in Argentina

• Project focuses on 10 health outcome/output targets (Trazadores) that are known to have an impact on infant and maternal mortality in the 9 poorest provinces of Argentina.

• Project pays for performance (e.g., healthy newborns) and NOT for inputs (e.g., supplies, equipment, infrastructure, personnel, drugs, vaccines)

• Project strengthens health system, including M&E, from within implementation arrangements rather than as an imposed covenant.

• Introduction of politically difficult changes possible

ARGENTINA – Output-based LendingTrazadora Results (Apgar Score)in three of the 9 poorest provinces

Source: Argentina Provincial MCH Project

Proportion of eligible births with Apgar score > 6 at minute 5, by province and quarterly targets, May 2005 – August 2006

0

10

20

30

40

50

60

70

Catamarca Chaco Tucuman

Perc

ent o

f birt

hs

First Target (Jun-Aug 05) First Actual Second Target (Sep-Dec 05)

Second Actual Third Target (Jan-Apr 06) Third ActualFourth Target (May-Aug 06) Fourth Actual

Source: VHA

Provider Payment Systems are One of Provider Payment Systems are One of Many Tools to Control CostsMany Tools to Control Costs

• Cost sharing requirements• Consumer and purchaser information• Vouchers• Supply restrictions• Increase medical appropriateness of care• Utilization management and review• Coordination of care among different providers through

financial and non-financial mechanisms• Efficient provider payment methods• All payer systems• Expenditure targets and limits

Provider Incentives Always MatterProvider Incentives Always Matter

• “The small pox so fatal and so general amongst us is here entirely harmless by the invention of engrafting.

• I am patriotic enough to take pains to bring this useful invention into fashion in England; and I should not fail to write to some of our doctors very particularly about it, if I knew any of them that I thought had virtue enough to destroy such a considerable branch of revenue for the good of mankind. But that distemper is too beneficial to them, …. ”

Source: Lady Mary Wortley Montague, Letter 31, Adrianople, Ottoman Empire, April 1, 1717

Provider Payment and Health SystemsProvider Payment and Health Systems

Health services delivery framework

Purpose(Level/Spread)Health statusFinancial protection Trust in health system

GOVERNMENT

Oversight&

Compacts

Client Power

Political Voice

PROVIDERSManagement systemsPerformance Management;

Human Resources; Financial Management; Information

Systems; Logistics: Drugs & Technology, Buildings, Auxiliary

Services

PoliticalEnvironment

SocialConditions

EconomicFactors

PhysicalEnvironment

Health Service Outputs(Level/Spread)UtilizationCoverageQualityEfficiency

InformationPerformance; Disclosure;Research

FinancingRevenue; Pooling;

Allocation; Payment

LeadershipStrategic direction;Values

External Development Partners

Non-Health SectorsEducationWaterAgricultureTransportPower

COMMUNITY

PEOPLEPoor /

Non-Poor

Organization of Health Services

Source: David Peters, World Bank 2006Source: David Peters, World Bank 2006

What Do We Mean by What Do We Mean by EfficiencyEfficiency

Efficiency DefinedEfficiency Defined

• Efficiency of financing base -- the economic costs resulting from changes in the production and consumption behavior of firms and households as a result of taxes and other revenue raising efforts

• Allocative efficiency – “doing the right things” -- purchasing the most cost-effective mix of outcomes

• Technical efficiency -- “doing things right” – producing a specific health outcome, intervention or service at lowest cost

Demand and Supply Side Approaches Demand and Supply Side Approaches for Improving Efficiency of Service Usefor Improving Efficiency of Service Use

Supply side approaches

Indirect mechanisms• Changing behavior via reimbursement mechanism• Changing market structure and behavior by

changing overall ownership (e.g., privatization of hospitals and facilities)

• Using global budgets, possibly in combination with other efficiency targets (e.g., staffing)

Changing care delivery• Adopting treatment protocols• Introducing performance management (e.g., setting

targets for length of stay, promoting day surgery)• Implementing business process reengineering• Adapting cost-reduction and efficiency targets

Planning approaches• Implementing hospital closure and reconfiguration

programs

Demand side approaches

Indirect mechanisms• Employing payment incentives to encourage

treatment of patients in primary or ambulatory care• Introducing user charges and co-payments

Demand management• Initiating an appropriateness and utilization review• Introducing “evidence-based purchasing”,

specifying explicit rationing of treatments, specifying a basic package of interventions

• Developing primary care substitutes• Promoting social and domiciliary care• Strengthening disease prevention activities• Adopting managed care or disease management

Source: M. Henscher

Factors Affecting Feasibility of Efficiency ImprovementsFactors Affecting Feasibility of Efficiency Improvements

Source: Hensher, CMH

Expenditure = IncomeExpenditure = Income

HEALTHCAREHEALTHCAREBUDGETBUDGET

HHOOUUSSEEHHOOLLDDSS

PPRROOVVIIDDEERRSS

GeneralGeneraltaxationtaxation

socialsocial‘‘insurance’insurance’

privateprivateinsuranceinsurance

user charges/user charges/copaymentscopayments

capitationcapitationpaymentspayments

fee per itemfee per itemof serviceof service

salariessalaries

from Reinhardt 1984from Reinhardt 1984

Flows of Funds to Medical Care ProvidersFlows of Funds to Medical Care Providers

PUBLIC AND PRIVATE ‘INSURANCE’ PROGRAMSPAYMENTS FOR SERVICES

FLOW OF SERVICES

INDEMNITYMODEL

DIRECT PROVIDERREIMBURSEMENTAPPROACHES ANDCONTRACT ARRANGEMENTS

PROVIDERS OF CARE PATIENTS

METHOD, UNIT, AND LEVELOF PAYMENT HAVE INCENTIVES FOR PROVIDERS THAT AFFECT:

TYPE, NUMBER AND QUALITY OF SERVICES PROVIDED

Incentives To ProvidersIncentives To ProvidersDepend On How They Are PaidDepend On How They Are Paid

• Unit of payment:– individual service– per visit/encounter– per day– per admission– per episode of illness– all (or a defined set of services) for a provider for a fixed period of time (i.e.,

salary or global budget)– all (or a defined set of) services for an individual for a fixed period of time (i.e. full

or partial capitation)• Level of payment

– providers costs– providers charges– administratively set by payor– negotiated– competitive bidding

Need To MonitorNeed To Monitor

• Costs

• Quality

• Access

• Impacts across different provider types

• Impacts across all public and private payors including those paying out of pocket

Difficult to Control Spending Without a Difficult to Control Spending Without a Single Set of Payment RulesSingle Set of Payment Rules

PUBLIC PRIVATE UNINSUREDSOURCES OFINSURANCECOVERAGE

DELIVERYSYSTEM PUBLIC FACILITIES

AND PHYSICIANSPRIVATE FACILITIESAND PHYSICIANS

BUDGET

FEE SCHEDULES

CHARGES

Where Do We Start – Where Do We Start – National Health AccountsNational Health Accounts

Table 1: National Health Expenditures Aggregate and Per Capita Amounts, Percent Table 1: National Health Expenditures Aggregate and Per Capita Amounts, Percent Distribution, and Average Annual Percent Growth, by Source of Funds: Selected Distribution, and Average Annual Percent Growth, by Source of Funds: Selected

Calendar Years 1960-2004Calendar Years 1960-2004

Table 2: National Health Expenditures Aggregate Amounts and Average Annual Table 2: National Health Expenditures Aggregate Amounts and Average Annual Percent Change, by Type of Expenditure: Selected Calendar Years 1960-2004Percent Change, by Type of Expenditure: Selected Calendar Years 1960-2004

Table 3: Personal Health Care Expenditures Aggregate and Per Capita Amounts Table 3: Personal Health Care Expenditures Aggregate and Per Capita Amounts and Percent Distribution, by Source of Funds: Selected Calendar Years 1970-2004and Percent Distribution, by Source of Funds: Selected Calendar Years 1970-2004

Source: VHA

Observations From a Big Observations From a Big Spender – The United StatesSpender – The United States

Medicare

Medicaid

Elderly

Poor

GOVERNMENT

Hospitals &

Doctors

INSURANCE COMPANIES

Employer Chooses

Benefits Dept.

Employers

Insured through employer

Self-insured

Uninsured

Emergency Room

No care

Health System in USA

Observations from the United StatesObservations from the United States• Doctors are the major problem --

professional model of autonomy, independent businessman, acute care/biological focus

• Consumers are a close second -- myths, choice, lack information

• Payment system is regressive and inflationary• IT/Telecom is required to practice 21st

century medicine – information volume, knowledge, decision support, communications

• We know what works clinically…at least enough to get a good start

David Lawrence, 2003

Observations From the United StatesObservations From the United States• Reform/transformation must come from outside the

system – entrenched interests block reforms• Health care workers and unions (where exist) can be

allies – resist hierarchy, critical perspectives on care, work in teams

• Leadership and Management are crucial – medical groups, teams, organizations, but ‘how to’ limited

• Uninsured/underinsured get care that everyone pays for – too late, inflationary, costs shifted, unethical

• Insurance competition is destructive to health delivery system reform – compete on risk

David Lawrence, 2003

Observations From the United StatesObservations From the United States

• Consumer co-pays affect utilization -- wrong structures mean wrong care (too little, too late, too much, too soon);

• Slow -- it took over a century to get to where we are now

• The stakes are very high -- deaths from avoidable errors (exceed Viet Nam, Korean, and two Gulf Wars >150,000/year (injured are 5-10 times that number); estimated 30%-50% of current spending either buys no improvement in health or causes harm or death (the cost of poor quality)

David Lawrence, 2003

Development of Payment Development of Payment Systems --Physicians, Systems --Physicians,

Hospitals, PharmaceuticalsHospitals, Pharmaceuticals

Paying PhysiciansPaying Physicians

• Fee for service

• Salary

• Capitation

• Combination methods (e.g., salaries with incentive bonuses, fee for service with individual physician and/or aggregate physician expenditure limits)

Fee For ServiceFee For Service

• Doctor receives a fee for each intervention/service provided

• Can be paid directly by the patient or by a third party payer (insurer or government)

• Definition and composition of the service bundle (e.g., CPT 4, DRGs) is critical

• Fee schedules are prospectively determined

Fee For Service Fee For Service IncentivesIncentives

• Health care providers can influence patients’ demand for health care, for providers’ own self interest

• Physicians concerned about patient’s health and own income

• Strong incentives to provide services• Strong incentives for over-treatment

Fee For Service IncentivesFee For Service Incentives

• May inflate prices and quantities unless there is some overall limit on spending

• Increases quantity of activity• Effects on access and quality depend on fee levels• Can be used efficiently if targeted to increase

interventions of proven cost-effectiveness• If relative fee levels don’t reflect real resource costs,

fee schedule will lead to inefficiency (e.g., if surgery is over-valued relative to office visits, physicians will do more surgery and less visits)

SalarySalary

• Doctors are paid a fixed amount for a certain amount of their time

• Salary can be set in any number of ways including negotiations between professional associations and health care funders (e.g., government or insurers)

• Salaries can vary according to age, experience, speciality, setting, and responsibilities of the doctor

Salary IncentivesSalary Incentives

• Incentives to under-treat• May be incentives to provide services that are

not the most cost-effective• Incentives to shift costs to other providers to

minimize work effort• Need to monitor performance

Salary IncentivesSalary Incentives

• Controls individual physician’s costs• Need to monitor access and quality • Need to monitor referral patterns including self-

referrals of patients by publicly employed physicians to their private clinics

CapitationCapitation

• A method of payment for a specified range of health services in which a managed care organization, physician or hospital is paid a fixed amount of money for each enrollee per period of time, regardless of the actual number of services provided to each person

• Can have full (e.g., responsible financially for all of the patient’s service needs) or partial (a subset of services such as primary care [i.e., primary care capitation], all physician care, lab tests, etc.)

• Financial risks are transferred to the capitated entity (sometimes referred to as supply side cost-sharing)

Capitation IncentivesCapitation Incentives• Incentives heavily influenced by services included in

the capitated bundle• Incentives to shift costs to providers of services that

are not included in the bundle• Incentives to prevent ill-health so patient doesn’t

come back for additional treatment• No incentives to over-treat• Incentives to under-treat, subject to attracting and

retaining patients as well as not having to deal with even more expensive illnesses at a later date

• Incentives to get rid of sicker than average patients • Effects on access, quality, and innovation

ambiguous

Payment Mechanisms for Physicians, Payment Mechanisms for Physicians, Financial Risk and IncentivesFinancial Risk and Incentives

Payment mechanism

Basket of services paid for

Risk borne by Provider incentives to

payer by provider increase no. of patients

decrease activity per consultation

increase reported illness severity

select healthier patients

FFS each item of service and consultation

all risk borne by payer

no risk borne by provider

yes no yes no

Salary one week or one month work

all risk no risk borne by physician

no n/a n/a yes

Salary and bonus

bonus based on no. of patients

salary portion

bonus portion yes n/a n/a yes

Capitation

all covered services for one person in a given period

amount above ‘stop-loss’ ceiling

all risk borne by provider up to a given ceiling (stop-loss)

yes no no yes

Source: Maynard and Bloor

Hospital PaymentHospital Payment

• Inpatient hospital vs outpatient hospital

• Inclusion or exclusion of physicians practicing in the hospital

• Capital costs vs operating costs

• Teaching hospitals, specialty hospitals, and general hospitals

• Extra billing of patients

Hospital Payment SystemsHospital Payment Systems

• Retrospective cost reimbursement• Prospective payments per service or case – fee

for service, payment by day, payment by admission, and payment by diagnosis-adjusted admission (e.g., DRGs)

• Budgets – line item, categories of spending (salaries, supplies, pharmaceuticals, other), global

• Capitation

Hospital Payment IncentivesHospital Payment Incentives

• Overall hospital costs

• Efficient hospital costs

• Inpatient vs outpatient hospital costs

• Individual patient’s costs, access, utilization, quality

• Physician costs

• Overall health care costs

Retrospective Cost ReimbursementRetrospective Cost Reimbursement

• Hospital is paid after the fact for ‘reasonable costs’ incurred in treating patients

• Good incentives for access and service provision

• No incentives to control costs unless there are cost limits

• Administratively complex

Prospective Payment Per Service or Prospective Payment Per Service or CaseCase

• Fee-for-service – strong incentives to increase number of services, good on access grounds, poor on overall cost grounds

• Payment by day – similar to fee for service; incentives to increase admissions and ALOS, but no incentives to increase individual services provided per day

• Payment per admission – incentives to increase number of admissions, reduce length of stay and services provided during the stay, and accept healthier patients

• Payment per diagnosis adjusted admission – incentives to specialize in conditions where hospital is most efficient, accept less severe cases within the diagnostic group, and reduce length of stay and services provided during the stay

BudgetsBudgets

• Line item and categories of items budgets – controls expenditures for narrow or broader categories of services, limit ability of hospital manager to operate efficiently and react to local circumstances if they cannot reallocate across categories, will promote inefficiency and waste if the initial allocations are not based on efficiency criteria, few incentives for quality or access

• Global budgets – give hospital administrators flexibility to reallocate across categories, controls overall hospital costs, but unless case-mix adjusted provides incentives for hospitals to not accept or under service more complex cases, few incentives for quality or access

Hospital Payment Mechanisms: Hospital Payment Mechanisms: Financial Risk and IncentivesFinancial Risk and Incentives

Payment mechanism

Basket of services paid for

Risk borne by Provider incentives to

payer by provider increase no. of patients

decrease activity per consul-tation

increase reported illness severity

select healthier patients

FFS

each agreed item of service and consultation

all risk borne by payer

no risk borne by provider

yes no yes no

Case payment (e.g. DRG)

payment rates vary by case

risk of no. of cases and severity classification

risk of cost of treatment for a given case

yes yes yes yes

Admission each admission

risk of number of admissions

risk of no. of services per admission

yes yes no yes

Per diem each patient day

risk of number of days

risk of cost of services per day

yes yes no no

Capitation

all covered services for one person in a given period

amount above ‘stop-loss’ ceiling

all risk borne by provider up to a given ceiling (stop-loss)

yes n/a no yes

Global budget

all services provided by an institution in a given period

no risk borne by the payer

all risk borne by provider

no n/a n/a yes

Source: Maynard and Bloor

Managed CareManaged Care• Systems that integrate financing and

delivery of contractually defined health services to enrollees– arrangements with select providers

(networks)– explicit standards to select providers– formal programs for quality improvement,

utilization review, and demand management– focus on prevention, limited cost-sharing– financial incentives for enrollees to use

network doctors

Source: modified from HIAA, 1995

Standard Health Insurance vs Managed CareStandard Health Insurance vs Managed Care

• free beneficiary choice of provider

• fee-for-service payments to providers

• not integrated with the delivery system

• insurer accepts all the financial risk

• little quality measurement and very limited care management

• selected provider network• gatekeeper role of primary care

physician and other utilization managers

• negotiated payments and incentives for cost control

• integrated systems• risk is shared• measures quality &

appropriateness• generally, more covered services /

benefits• low out-of-pocket costs for

members using the network

Health Insurance(U.S. 15 – 20 yrs ago)

Managed Care

Source: modified from modified from HIAA, 1995

Managed Care FeaturesManaged Care Features

Governments

Employers

Individuals

Beneficiaries

Network/Preferred Providers:

StaffGroup

NetworkIPA

Managed CareOrganization

Premiums/Risk-Adjusted Capitation

Cost-sharing

Non-NetworkProviders

Extra PaymentFor out of plan useIn POS plans

Services

Selection criteriaReimbursement ProceduresRisk sharing arrangementsQuality assurance

Contributions by employeeor household

Utilization/Demand mgmt

Managed Care MechanismsManaged Care Mechanisms

• Establishing risk-adjusted premiums• Determining the benefit package including

consumer cost-sharing• Selection and organization of provider

network• Transferring risk and paying providers• Monitoring quality and controlling service

utilization

Source: Glied

Adverse SelectionAdverse Selection

• Definition: The problem of attracting members who are sicker than the general population

• How can it be managed?

Cigich SM. Ch 23: Rating and Underwriting. in Kongstvedt Essentials of Managed Care, 2nd edn

Why Risk Adjusters are Necessary?Why Risk Adjusters are Necessary?

• To deter plans from selecting or marketing to healthier enrollees

• To protect plans from being selected by a costlier than average group of enrollees &, in worst case, go broke.

• To facilitate plans’ attempts to specialize in treating people with certain illnesses or conditions; to support different levels of care

Source: modified from PPRC, 1994

Risk Adjustment MechanismsRisk Adjustment Mechanisms

• Risk segmentation in health insurance markets due to adverse selection and medical underwriting can result in the sickest individuals being denied access to affordable health insurance and/or care

• Can mitigate this problem by risk assessment and risk adjustment ex ante or ex post

• Risk assessment – means of predicting the deviations of each individual’s expected costs from the average enrollee’s costs

• Risk adjustment – the method used to compensate a health plan according to the amount of risk it assumes, making it possible to compensate insurance plans according to the risks of the enrollees they take on

Source: Rogal and Lee and Rogal

Ex Post Risk AdjustmentEx Post Risk Adjustment

• Ex post adjustments can take place through hold harmless provisions/reinsurance/reimbursement for expenses incurred above certain thresholds.

• Examples include reinsurance for high cost cases, stop/loss insurance, reimbursement supplements when certain conditions are met (e.g., length of stay or cost outliers under a hospital DRG system).

• Ex ante risk adjustors can also be used in ex post adjustment systems.

• Ex post adjustors add some uncertainty for the insurer/MCO.

Ex Ante Risk Assessment ModelsEx Ante Risk Assessment Models

• Demographic variables – age, sex, family status, location, and welfare status

• Health status – self-reported health status, diagnosis, prior service use

ModelsModels

• AAPCC (adjusted average per capita costs) – used by U.S. Medicare program, based on average payments for fee for service providers in a county adjusted for differences in input prices. This amount is then adjusted for age, sex, welfare status, institutional status, disability status, and ESRD status.

• ACGs (adjusted clinical groups) – diagnosis-based measure, which classifies each individual into one of 81 categories based on inpatient and ambulatory diagnosis codes. Categories are all mutually exclusive.

ModelsModels• DCGs (Diagnostic Cost Groups) – uses inpatient and

ambulatory diagnoses in one year to predict total medical expenditures. Individuals are assigned to one or more of 136 possible medical condition categories based on diagnosis code and one of 32 age/gender categories.

• RXGroups – is a pharmacy based risk assessment model which assigns each individual to one or more of 27 medical categories for adults and 42 for children. Each person is also assigned to one of 22 age/gender groups.

• Self-Reported Health Status – use Short Form 36 (SF- 36), which captures multiple dimensions of health. Survey is self-administered and widely used in outcomes research.

ModelsModels

• Physiologic Health Measures – cholesterol levels above 259, diastolic blood pressure above 89, glucose level above 159, etc. Problem is these measures go beyond information available on claims forms

• Mortality – using mortality for certain high cost groups (e.g., ESRD, cancer)

• Health Service Use – total expenditures, number of hospital days in the past two years

Summary FindingsSummary Findings

• Simple models using age and sex can predict medical expenditures well at the group level, particularly for random groups over 1000.

• Models predict less well for non-random subgroups such as those with previously low expenditures, cancer patients, or those with prior multiple hospitalizations. However, non-random groups that enroll in specific insurance plans/MCOs may be quite important from a policy perspective.

• Pharmacy-based models perform at a level similar to diagnosis-based models for prospective risk assessment but less well in terms of predicting spending in the same year (concurrent risk assessment).

• No system has yet been shown to adequately predict variations in individual expenditures. However, existing systems may temper the worst selection bias incentives.

Source: Society of Actuaries, 1995, 2002

Practical Concerns of Risk AdjustmentPractical Concerns of Risk Adjustment

• Need to predict health expenditures well enough to limit risk selection by insurance plans and MCOs

• Administrative feasibility including availability, accuracy and timeliness of information

• Resistant to gaming behavior by providers• Must not provide incentives for socially inefficient

behavior such as unnecessary hospital admissions

Source: Dunn et al., Society of Actuaries

Basic Managed Care Models:Basic Managed Care Models: Defined by Physician EmploymentDefined by Physician Employment

• IPA - contracts with a managed care plan, physicians remain independent

• Network - managed care plan contracts with multiple physician groups for services

• Group - managed care plan contracts with a medical group for services

• Staff - physicians are employees; treat members in the MCO’s facilities

Control over practice

Most

Least

Key: Physicians control resources, so management structures and their payment incentives leverage costs in the health sector.

Source: Lyles

Point of Service (POS) Plans:Point of Service (POS) Plans:A Product to Offer More ChoiceA Product to Offer More Choice

• Comprehensive benefits• More consumer choice• Use primary physician for care and referrals• Use of out-of-network providers with larger

member payments• Each time services are used, the member

decides at the point-of-service to go in or out of the network

• Actuarial projections underestimated enrollment and use

Source: modified from HIAA, 1995

Managed Care Approaches to Cost Managed Care Approaches to Cost ControlControl

• Reimbursement Methods• Contract negotiations• Choice of Provider(s), then

– Credentialing– Profiling

• “Gatekeeper”• Utilization Review• Case Management• Quality Measurement

Source: modified from HIAA, 1995

Utilization Management Through ProfilingUtilization Management Through ProfilingPhysician A is Ordering More Diagnostics for Asthma Patients than Physicians in Physician A is Ordering More Diagnostics for Asthma Patients than Physicians in

the Peer Groupthe Peer Group

29%

14%

7%

16%

6%

2%

0%

5%

10%

15%

20%

25%

30%

35%

Chest X-Ray Breathing CapacityTest

Thyroid Panel

% o

f A

sth

ma

Ep

iso

de

s Physician A Peer Group

Source: SchneiderSource: Schneider

Managed Care MessagesManaged Care Messages

• There is no single model of managed care – ‘if you’ve seen one managed care organization (MCO), you’ve seen one’.

• Managed care embodies a variety of health policy choices concerning provider payment methods, risk adjustment, utilization management, utilization review, vertical and horizontal integration of the delivery system, and combining financing with delivery.

• Policy-makers need to tailor these various aspects of managed care to the financing and delivery situations on the ground.

Pharmaceutical SectorPharmaceutical Sector

• Dealing with both health sector policy and industrial policy as pharmaceutical industry is often a major industrial, sometimes export-oriented, sector

• Large part of health care spending – 25-40 percent of health spending in MENA and generally largest item of household medical expenditures

• Cost control requires control of price and volume of prescribing

• Efficiency requires demand and supply side regulation

• Equity may be reduced by user charges

Source: Maynard

Pharmaceutical SectorPharmaceutical Sector

• Supply side payment and regulation:

- manufacturing industry

- wholesalers and retailers• Demand side payment and regulation:

- influencing patients

- influencing doctors• Consumer and physician education on

rational use of drugs (including guidelines) is essential

Source: Maynard

Supply Side Regulation: Licensing, Supply Side Regulation: Licensing, Reimbursement, and ProfilingReimbursement, and Profiling

• Registration procedures broadly similar: evidence of safety and efficacy

• Many countries restrict reimbursement by positive lists or negative lists

• Increasingly, governments are encouraging provision of economic data and evidence of cost-effectiveness (RCTs and actual practice)

• Profiling physician practices

Source: Modified from Maynard

Physician Profiling and FeedbackPhysician Profiling and FeedbackPharmaceutical Cost for Pneumonia in % of Peer Group

131%118%

84%

185%

62%

176%

77%

149%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

A B C D E F G HPhysician ID Number

Source: Schneider

Supply Side Payment and Supply Side Payment and Regulation: Price ControlsRegulation: Price Controls

• Reference price systems: patients pay any difference between the brand price and a reference price (for generics or same therapeutic group)

• Direct cost-plus pricing• External comparison pricing• To achieve cost containment, essential

to control not just price but also volume

Source: Maynard

Supply Side: Retailers and WholesalersSupply Side: Retailers and Wholesalers

• Fixed profit margins to facilitate cost control• Require generic substitution

Source: Maynard

Demand Side Regulation and Payment: Demand Side Regulation and Payment: Influencing PatientsInfluencing Patients

• Cost sharing – deductibles, copayments, coinsurance

• Conditional cash transfers• Reference prices• Caps• Consumer education

Source: Maynard

Need to Regulate the Private SectorNeed to Regulate the Private Sector

• Cost inflation– Medical care inflation rate usually exceeds the CPI and GDP

deflator– Health spending growth often exceeds GDP growth

• Inefficiency– shifting of costs from constrained public to unregulated

private sector– medical practice variations– failure to invest in outcome measurement– absence of practice guidelines

• Inequity– private markets may cream skim good risks– poor, sick, elderly likely to be excluded and/or become

responsibility of the public sector

Source: Maynard

Government Tools for Influencing the Government Tools for Influencing the Private SectorPrivate SectorLevel of intrusiveness Tool or method Application

 Most intrusive

Direct provision          Public hospitals and clinics         Preventive services         Sanitation

  

Financing          Budgetary support         Subsidies         Concessions         Contracting

Regulation and mandates          Taxation         Licensure         Accreditation         Employee health insurance         Required immunization of school children

Least intrusive Information          Research—product testing         Provider information— treatment protocols, recommended medicines         Consumer information— provider quality comparisons, consumers’ rights, dangers of smoking, rehydration methods, birth spacing

Source: Taylor adapted from Musgrove 1996

Need to Regulate the Private SectorNeed to Regulate the Private Sector

• Design of regulatory framework determined by objectives and their ranking– cost control is usually the primary problem

• Regulatory frameworks: complex and costly• Many countries regulate the private sector

inadequately• Ignoring the need for private sector regulation

ensures cost inflation, inefficiency, inequity, and cost-shifting to the public sector

Source: Maynard

Implementation IssuesImplementation Issues

ImplementationImplementation

Payment Design

Quality Assurance

Provider Autonomy

Information

Systems

Source: J. Langenbrunner

System Development IssuesSystem Development Issues

• Set payment levels to cover costs of efficient provision

• Develop contracts among payors, providers and consumers

• Develop management information and quality monitoring systems at payor and provider levels

• Provide appropriate training for payor and facility personnel and information to consumers

• Develop needed regulatory structure including an appeals process

System Development IssuesSystem Development Issues

• Define services covered (i.e. benefit package )• Obtain unit service cost information • Define an “efficient” level of service provision

costs• Evaluate administrative costs of options

including costs to payors, providers and consumers

• Choose payment method(s)/may vary by provider type

Implementation IssuesImplementation Issues

• Demonstrate and evaluate system in sample facilities, practice settings and geographic areas

• Modify system and implement countrywide • Undertake needed complementary delivery

system restructuring and manpower training reforms

• Monitor cost, quality, and access, and revise system periodically as needed

LessonsLessons

• It is easier to expand access and develop system infrastructure than to reduce capacity and control costs.

• Macro cost containment strategies have often not resulted in micro efficiency, and conversely.

• Empowering consumers and having money follow patients within the context of an overall budget appear to be the preferred strategies for controlling costs.

• Specific medical care provider payment strategies such as certain types of managed care, DRGs, and various full and partial risk sharing approaches, if appropriately implemented, appear to control costs without compromising quality and access.

LessonsLessons

• When payment reforms are imposed in one part of the health sector, expenditures and access in other substitute and complementary sectors must be monitored.

• Payment mechanisms used in OECD countries require sophisticated administrative and information structures.

• New types of managed care arrangements as well as vertical integration of services have blurred the distinction between financing, provision, and reimbursement. There is little hard evidence concerning the managed care “revolution”.

LessonsLessons

• Fragmented fee for service systems like the U.S., without a single payor or set of rules applying to the whole system, have been the least successful in controlling expenditures and guaranteeing access.

• Most countries are faced with surpluses of physicians, especially specialists, and hospital beds, and have had limited success in controlling either either.

• Consumer expectations, new technologies, and aging populations continue to place pressure on health care expenditures.

ANNEXANNEX

CASE MIX BASED CASE MIX BASED HOSPITAL HOSPITAL PAYMENTSPAYMENTS

Hos

pita

l Act

ivity

Dat

a

Case Mix Complexity

Hospital E

xpend./ Cost D

ata

Funding and Managing

Hospital Services

The Example of Case-Based PaymentsThe Example of Case-Based Payments

Source: Wiley, 2006

Case Mix Case Mix may be understood may be understood as a “system for separating as a “system for separating hospitalized patients into hospitalized patients into unique groups based on their unique groups based on their diagnoses and procedures” diagnoses and procedures” (R.B Fetter, Diagnosis related groups, in Encyclopedia of Biostatistics, P. (R.B Fetter, Diagnosis related groups, in Encyclopedia of Biostatistics, P. Armitage, & T. Colton, eds. Wiley, Chichester, 1998)Armitage, & T. Colton, eds. Wiley, Chichester, 1998)

Dimensions of Hospital OutputDimensions of Hospital Output

• Volume – numbers treated

• Quality – hospitals contribution to the successful

outcome/resolution of patients’ illnesses/health problems

Case mix the proportion of cases of each disease and

health problem treated in the hospital

(Hornbrook, MC Techniques for assessing hospital case-mix, Annual Review of Public

Health, 6, 295-324)

Development of Case-Mix Based Development of Case-Mix Based Hospital Payment SystemsHospital Payment Systems

• Hospital activity data -- coding of clinical data – ICD–10-AM

• Hospital contact information

– availability at the patient, department, specialty level?– completeness?– quality? – timeliness?

• Choice of specific case-mix payment system

i. Hospital Number

ii. Patient Number

iii. Sex

iv. Age

v. Marital Status

vi. Place of Residence

vii. Month and Year of Admission

viii. Duration of Stay

ix. Discharge Status

x. Main Diagnosis

xi. Other Diagnoses

xii. Surgical and Obstetric Procedures

xiii. Other Significant Procedures

Minimum Basic Data SetMinimum Basic Data Set

Source: Wiley, 2006

Source: Wiley 2006

Selection of a Case Mix SystemSelection of a Case Mix System

• Patient groups specified should be

– medically meaningful

– defined by commonly found data

– manageable, mutually exclusive, exhaustive– have similar expected measures of output

utilisation– be comparable across coding systems

Source: Wiley 2006

Issues Arising When Comparing Issues Arising When Comparing Case-Mix SystemsCase-Mix Systems

• Data requirements and compatibility with available clinical coding schemes

• Statistical performance and clinical acceptability when tested on local data bases

• International use• Availability of updates, training, technical and

technological support• Cost, availability, user interface and proprietary

status• While there are many alternative

approaches to measuring case mix, the Diagnosis Related Group (DRG) system is the most commonly applied at the national level internationally

Source: Wiley 2006

““How to” -- Case-Mix Adjusted Per How to” -- Case-Mix Adjusted Per Admission (“DRGs”)Admission (“DRGs”)

Case-MixCase-MixGroupingsGroupings

Statistical/Economic

Teams

Collect Financial,Capacity,

and Utilization Data

Allocate Costsby DepartmentAllocate Costsby Department

Form Groupings

RefineGroupings

ClinicalTeams

RelativeWeights

Assess Impacts

1

2

Estimate Costs Per Category

Source: Langenbrunner 2006

Data Requirements for DRG AssignmentData Requirements for DRG Assignment

• Primary Diagnosis• Secondary Diagnoses• Surgical Procedures performed• Age• Sex • Discharge status

– Additional• Birth weight, days on mechanical

ventilation, mental health legal status, same day status

Source: Wiley 2006

Strategic IssuesStrategic Issues

• Objectives?– Greater productivity?– Improved efficiency?– Cost containment?

• Data sources– Quality– Comprehensiveness– Timeliness

• Technical Factors– Coding systems– Feasible Options – Supports

Source: Wiley 2006

DRG AssignmentDRG Assignment

• Initial classification by Major Diagnostic Category (MDC)– 25 MDCs approximate body

system/medical specialty

• Final classification by Diagnosis Related Group (DRG)– there are currently over 500 groups

in the generic DRG system Source: Wiley 2003

Major Diagnostic Categories

MDC

1 Diseases and Disorders of the Nervous System2 Diseases and Disorders of the Eye3 Diseases and Disorders of the Ear, Nose, Mouth & Throat4 Diseases and Disorders of the Respiratory System5 Diseases and Disorders of the Circulatory System6 Diseases and Disorders of the Digestive System7 Diseases and Disorders of the Hepatobiliary System & Pancreas8 Diseases and Disorders of the Musculoskeletal System & Connective Tissue9 Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast10 Endocrine, Nutritional & Metabolic Diseases and Disorders11 Diseases and Disorders of the Kidney & Urinary Tract12 Diseases and Disorders of the Male Reproductive System13 Diseases and Disorders of the Female Reproductive System14 Pregnancy, Childbirth & The Puerperium15 Newborns & Other Neonates with Conditions Originating in the Perinatal Period16 Diseases and Disorders of the Blood, Blood Forming Organs and ImmunologicalDisorders17 Myeloproliferative Diseases and Disorders, and Poorly Differentiated Neoplasms18 Infectious & Parasitic Diseases, (Systemic or Unspecified Sites)19 Mental Diseases & Disorders20 Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders21 Injuries, Poisoning & Toxic Effects of Drugs22 Burns23 Factors Influencing Health Status and Other Contacts with Health Services24 Multiple Significant Trauma25 Human Immunodeficiency Virus Infections

(Source: DRG Definitions Manual)Wiley 2003

Source: Wiley 2003

Source: Wiley 2003

Source: Wiley 2003

Dominant DRG Groupers Internationally

HCFA (CMS) DRGs (1989-)

AP-DRGs (1988-)

APR-DRGs (1991-)

NY-DRGs (1990)

SR-DRGs (1994)

NY-DRGs NACHRI

(1988-1989)

(Yale) RDRGs (1989)

HCFA DRGs (1983- 1988)

(Yale) DRGs (1979)

IR-DRGs (2000-)

AR-DRGs (Australia)

Source: Wiley 2006

Other StepsOther Steps

• Cost data must be collected• Costs must be allocated to each DRG

category resulting in the determination of the relative weights per case

• A standardized cost per case needs to be determined

• Other appropriate adjustments need to be decided – teaching hospitals, regional cost differences in inputs, etc.

where,where,

Payment per case = price paid by purchaser for casesPayment per case = price paid by purchaser for cases in a particular case groupin a particular case group

BRBR = base rate, or global average = base rate, or global average cost per casecost per caseCGWCGW = case group weight for case group = case group weight for case group

Payment Per Case = BR * CWGPayment Per Case = BR * CWG

Source: Langenbrunner 2006

Incentives of DRGs for ProvidersIncentives of DRGs for Providers

• Cut unnecessary hospitalizations

• Reduce inputs per case• Improve the efficiency

and quality of the input mix

• Reduce length of stay• Shift post-acute care

(e.g., rehab) to the outpatient setting

• Improve data and record keeping

• Increase unnecessary admissions and re-admissions

• Excessive reduction in care and intensity

• Avoidance of costly cases

• Premature discharge• Poor post-acute

placement• Upcoding or recoding to

improve reimbursement rate

Source: Langenbrunner 2006

Provider Payment IssuesProvider Payment Issues• What are the major problems with the provider payment

mechanisms used in Thailand: – no incentives for technical and allocative efficiency, no limit on

spending, poor quality, and/or limited access– who are the current winners and losers -- physicians, hospitals,

patients, health insurance funds, governments?

• What are the most needed reforms?• What are major impediments to implementing these

reforms:– lack of information on clinical effectiveness– lack of information on costs and cost-effectiveness– lack of provider and patient level information on diagnosis and

procedures– lack of technical knowledge of payment methods – DRGs,

capitation, managed care, etc. – other?