Lecture 6 - Pooling and resource allocation

Question 1

What is allocative efficiency?

Answer 1

Combining inputs to produce maximum health improvements given limited resources

Question 2

What is procedural equity?

Answer 2

Maximising the fairness in the distribution of services across groups

Question 3

What is substantive equity?

Answer 3

Minimising inequalities in the distribution of health

Question 4

What is horizontal equity?

Answer 4

Treating equals equally

Question 5

What is vertical equity?

Answer 5

Treating unequals unequally

Question 6

What are the 3 methods of resource allocation?

Answer 6

• Retrospective reimbursement
• Reimbursement for activity based on fixed fee schedule
• Prospective funding (budget, capitation)

Question 7

Compare the financial risk for insurers/purchasers vs provider for the 3 methods of resource allocation.

Answer 7

Retrospective reimbursement
- High risk for insurers
- Low risk for providers
- No incentive to eliminate waste
- Could inflate costs
- Funding commitment uncertain

Reimbursement for activity based on fixed fee schedule
- Lower risk for pooling agency
- Higher risk for provider
- Funding commitment uncertain

Prospective funding
- Low risk for insurer/purchasers
- High risk for providers
- Providers could skimp on quality, technology, cost shifting, risk selection
- Funding commitment is fixed

Question 8

How can you set are 4 ways you can set the amount of prospective budgets?

Answer 8

1. Bids from purchasers
2. Political negotiation
3. Historical precendent
4. Independent measure of need (population size and/or characteristics)

Question 9

What are the implications of the 4 methods of prospective budgeting as highlighted by Rice and Smith (2002)

Answer 9

Bids from purchasers - strategic bidding; inflate bids or under-cut competition

Political negotiation - accusations of political favouritism, unstable

Historical precedent - does not encourage efficiency

Independent measure of need - increasingly widespread use, encourages efficiency

Question 10

What are the 3 levels you can pool funds at?

Answer 10

1. National collection
2. Regional/local collection
3. Individual social health insurance/public health insurance funds

Question 11

How many pools are there when collection is at the national level?

Answer 11

Single pool

Question 12

How many pools are there when collection is at the regional/local level?

Answer 12

Multiplepools

Question 13

How many pools are there when collection is via individual SHI/PHI funds?

Answer 13

Single or multiple

Question 14

Does the Netherlands’ SHI scheme have single or multiple pools?

Answer 14

Multiple but 10% goes to the scheme itself and the remaining 90% goes to a national body that redistributed the funds, so becomes more similar to a single national pool

Question 15

Why is there a need for prospective resource allocation policies?

Answer 15

Without risk adjustment, equity and efficiency concerns arise.

• Efficiency: By setting clear criteria for resource allocation, healthcare systems can avoid duplication of services and ensure resources are directed towards the most effective interventions. Prospective allocation policies help ensure resources are distributed fairly and efficiently to meet the needs of the population within budgetary constraints.
• Equity: Without clear allocation strategies, some areas or populations might receive a disproportionate share of resources, leading to unequal access to healthcare. Prospective allocation aims to distribute resources fairly, ensuring everyone has access to essential services based on need.

Question 16

What is “risk adjustment”?

Answer 16

The process by which the health status and health needs of a population are taken into account when allocating resources or setting capitation rates

Estimate predictable variations in annual per-person health care expenditure

Take into account demographic changes

Goal is to provide equitable compensation

Question 17

What is capitation?

Answer 17

A fixed amount of money per patient, paid in advance to the physician for the delivery of healthcare servcies. This fixed amount is the same for all patients, regardless of their age, health status, or expected healthcare needs.

Essentially a micro-insurance scheme; Assigns a budget to a provider/region based on the population it covers. Per person fee is paid. People managing the money essentially become a micro insurance fund.

Question 18

Why is performance monitoring and context important in risk adjustments?

Answer 18

Need to monitor/compare performance and context; Need to know the risks of the patients people are treating to know whether health outcomes are good or not (i.e. one doctor has a higher mortality than the other, don’t know if he is a bad doctor because it is possible the population he treats is sicker)

Question 19

Why do you need to risk adjust?

Answer 19

• health status across populations varies significantly
• aim for allocations based on efficiency and quality, not risk selection
• imperfect information; risk adjustment aims to predict resource requirements, provider behaviour and performance
• incentive problems with prospective and retrospective resource allocation (supplier induced demand, underproduction, cost shifting, risk selection/cream skimming)

Question 20

What are some incentive problems that can arise without risk adjustment?

Answer 20

Supplier-induced demand; in a FFS system where price is greater than marginal cost

Underproduction; in budget/capitation systems or FFS where marginal cost is greater than price

Cost shifting; in budget/capitation systems

Risk selection/cream skimming; attract low risk (in budget/capitation systems)

Question 21

What are the 2 incentive problems that can arise under FFS?

Answer 21

Supplier-induced demand (when price > MC)

Underproduction (when MC > price)

Question 22

What are the 3 incentive problems that can arise in budget/capitation systems?

Answer 22

Underproduction

Cost shifting

Risk selection/cream skimming

Question 23

What is risk selection/cream skimming?

Answer 23

A practice in insurance where insurers try to enroll a higher proportion of healthy individuals and avoid enrolling those with a higher risk of filing claims. This strategy aims to maximize profits by minimizing the payouts the insurer has to make.

Question 24

What are the risks with unadjusted capitation?

Answer 24

1. Risk Selection/Cream Skimming

Incentive for Cream Skimming: Unadjusted capitation payments are fixed amounts per patient enrolled, regardless of their health needs. This creates an incentive for providers to select healthier patients with lower expected healthcare costs. They benefit financially by enrolling a population that requires less care for the same fixed payment.

2. Underproduction:

Disincentive to Provide Necessary Care: Since providers receive a fixed amount per patient, they might be discouraged from providing necessary services, especially preventive care, if it reduces their profit margin. This can lead to delayed diagnoses and potentially more expensive health problems down the road.

3. Cost Shifting

Shifting Costs to Others: Providers who receive a fixed amount per patient might look for ways to reduce their own costs. This could involve referring patients to specialists outside their network (cost-shifting) or even discharging them from hospitals prematurely.

4. Quality Challenges:

Focus on Short-Term Gains: The financial pressure associated with unadjusted capitation can lead providers to prioritize short-term cost savings over long-term investments in quality improvement measures. This can compromise the overall quality of care delivered to patients.
Discouragement of Preventive Care: The disincentive to provide necessary services can extend to preventive care. This can lead to a higher prevalence of preventable diseases and ultimately higher overall healthcare costs.
Focus on Quantity over Quality: Unadjusted capitation can incentivize providers to see more patients quickly to maximize their income within the fixed capitation payment. This may compromise the quality of care provided to each patient.

Question 25

How should capitation fees be adjusted?

Answer 25

Need to be adjusted based on an unbiased estimate of an individual’s expected needs/costs relative to others in the pool, based on their personal characteristics

Question 26

What are risk adjustors?

Answer 26

Variables that are taken into account during a risk adjustment

e.g. patient characteristics, provider characteristics (specialist, hospital, nurses), nature of services they provide (pricing, intensity, duration)

Question 27

What are exogenous variables when it comes to risk adjustors?

Answer 27

These are variables related to a patient’s health status and social circumstances that are beyond the control of the provider or the patient.

Examples
Age: A patient’s age is a significant predictor of healthcare costs, as older individuals tend to require more care.
Gender: There can be some gender disparities in healthcare utilization.
Socioeconomic status: A patient’s income and education level can influence their health outcomes and healthcare needs.

Question 28

What are endogenous variables when it comes to risk adjustors?

Answer 28

These are variables related to a patient’s health status and healthcare utilization that can be influenced by the decisions of the provider or the patient.

Examples
Diagnoses: The specific diagnoses a patient receives can be influenced by how thoroughly a provider investigates their symptoms.
Procedures: The types of procedures a patient undergoes might be influenced by provider treatment decisions.
Hospital admissions: Readmission rates can be influenced by hospital discharge planning and follow-up care.

Question 29

What is the issue with exogenous variables as risk adjustors?

Answer 29

Strong incentive for selection

Question 30

What is the issue with endogenous variables as risk selectors?

Answer 30

Weakens cost control and are more gameable since providers have control over these adjustors

Question 31

What is the pro of using exogenous variables as risk adjustors?

Answer 31

Better cost control (payments are better in line with actual cost, reduce chance of gaming)

Question 32

What is the pro of using endogenous variables as risk adjustors?

Answer 32

Reduce selection incentives

Question 33

Why is it hard to determine real need of a population?

Answer 33

• lack of data
• evidence of need factors is sparse
• need factors are interrelated (e.g. income, employment, geographical location)
• demand/need may be influenced by supply-side factors such as local prices
• purchasers will try to influence the choice of need factors to their advantage

Question 34

What are the 2 methods for selecting needs factors? Explain them.

Answer 34

1. Matrix approach: complex, grid shows how different combinations of need factors affect the capitation fees that are paid, individual-level data
2. Index approach: uses aggregate measures, make conclusions about a population based on a sample, extrapolate

Index approach is good for countries which have data challenges and limited admin capacity.

Question 35

Explain the case study of England in its territorial reallocation of funds.

Answer 35

• Created to increase equity of access
• Population pays taxes to HM Treasury, which is then paid to the Department of Health and Social Care after a negotiated settlement. The Department of Health and Social Care assigns budgets to Regional Purchasing Units (including Clinical Commissioning Groups - CCGs) on the basis of risk-adjusted capitation. Regional purchasing units them pay for services from providers.
• Their resource allocation system is heavily weighted towards the Standardised Morality Ratio < 75 unmet needs index
• There was lots of duplication/overlap/interrelatedness between the factors taken into account, which had negative effects on efficiency since there was a risk of certain providers being overly benefitted since they had certain characteristics favoured by the weighted capitation formula
• Resulted in significant redistribution from wealthier to poorer areas

Takeaway: extensive risk factors may lead to more equal access for equal need

Question 36

Explain the case study of the Netherlands in its non-territorial reallocation of funds.

Answer 36

• Fund are reallocated among social health insurers, not regions
• Created to reduce risk selection incentives
• Population pays income-related contribution to a central fund, and this money is passed on to competing private insurance funds via risk adjusted capitation. There is also a flat-rate contribution paid by the population to the insurance funds. The central fund is the main source of financing - population flat rate contribution is never more than 10% of total.
• In 2006 passed reforms to create competition between insurers. Insurers can vary their rates and customers can choose their insurer.
• Different insurers receive different amounts from the fund depending on the population they serve.
• During the first year of the new system there was a spike in the number of people switching insurance company. Healthy people more likely to switch. Lack of switching demonstrates that competition didn’t work
• Insurers ended up having lower profits so there was consolidation in the market which meant the reform might not work as planned. Moved from a free market to more of an oligopoly.
• Insurers were allowed to pick what providers they contracted with but they all contracted with all providers so there was no incentive for low-quality providers to drop out of the market
• Data showed that patients with complex needs were under compensated for, and patients with less needs were over-compensated. Shows that insurers still has incentive to risk select despite reform.

Question 37

What is weighted capitation?

Answer 37

Weighted capitation is a resource allocation method used in healthcare financing to distribute funds to providers or regions based on the relative needs of their insured populations.

Question 38

What are the pros and cons of England using the SMR < 75 unmet need index in their territorial fund reallocation?

Answer 38

Pros
- Data is available at the small area level
- Data is frequently updated
- Data is highly correlated with deprivation
- Deaths are properly recorded
- Straightforward to understand

Limitations
- Relies on premature mortality beign a reliable proxy for morbidity, whereas many cases (e.g. mental health) result in disability rather than death
- Only indirectly links to health inequalities experienced by people under 75

Question 39

What are the 4 types of risk selection according to WPMM ven de Wen et al 2017? (Four types of actions that in the case of imperfect risk equalization and premium rate restrictions can be qualified as risk selection)

Answer 39

Both customers and insurers can behave in a manner that leads to risk selection. Reason why cross-subsidies may not work in practice.

Actions by insurers:
- Type 1 action (action w/ goal): being non-responsive to the preferences of unhealthy people with the goal to keep them away from the health plan
- Type 2 action (action w/ effect): improving the quality of care for unhealthy people with the side effect that they attract a disproportionately large number of these people

Actions by consumer:
- Type 3 action (action w/ goal): healthy consumers choose a limited provider plan with a low premium with the goal of avoiding paying higher premiums that cross-suibsidises unhealthy consumers
- Type 4 action (action w/ effect): unhealthy consumers choose high-cost, high-quality plans more often than the healthy, with the side effect that these groupds end up in different pools with different premiums