Lecture 9 - Hospital Payment Models

Question 1

What are 4 reasons that cost and performance may vary across hospitals?

Answer 1

1. Different populations served
2. Environmental/exogenous conditions
3. Quality differs
4. Effort or efficiency differs

Question 2

What are 2 forms of information disadvantage faced by the Ministry of Health as a principal?

Answer 2

1. Hospitals know more about the cost of production
2. MoH doesn’t know how much effort hospitals exert

Question 3

What is the function to represent the costs faced by hospitals?

Answer 3

C = C(Q,w,r,Z,e)+ε

Q - activity
w - wages
r - rent
Z - exogenous factors
e - effort
ε - random shocks

Question 4

What is a function to represent the utility experienced by hospitals?

Answer 4

Utility = U(R-C,e)

R - revenue
C - cost
e - effort

Get utility from profit

Question 5

What does ΔC/Δe < 0 mean?

Answer 5

Cost should go down the more efficient you are

Question 6

What does ΔU/Δe < 0 mean?

Answer 6

• lose utility from increased effort

Question 7

What is the conflict between hospitals and payers in terms of effort?

Answer 7

More effort = lower costs but also lower utility

Question 8

What is line item budgeting?

Answer 8

Funds allocated to cover the costs of specific inputs

Question 9

What is fee for service?

Answer 9

A payment model in which doctors, hospitals, and medical practices charge separately for each service they perform.

• Can result in cost escalation since price is volume-driven
• Incentive for high-cost interventions
• Big admin burden

Question 10

What is a block contract?

Answer 10

Contracts specified for a hospital department. Sets out the volume of activity and may set out quality.

• Type of per-capita payment model
• Less bills than FFS so less admin

Question 11

What are casemix payments?

Answer 11

Groups of patients expected to have similar costs are grouped together and a price is estimated for their diagnosis

• prospective price based on yardstick competition
• quality often added into the payment function

Question 12

What is yardstick competition?

Answer 12

• Find the average cost of hospital population
• Pay that price
• Hospitals whose costs are higher have to reduce costs
• Those who spend less can pocket additional money

Question 13

What is the revenue function for line item budgeting?

Answer 13

Σ^z _z=1 x_zw_z

x - quantity of each input
w - unit cost of each resource
z - line item

Question 14

What is the revenue function for fee-for-service payments per patient?

Answer 14

Σ^N _i=1 x_isp_s

N - number of patients treated
x_is - quantity of each medical service for each patient
p_s - price per service

This formula will find the total fee per patient

Question 15

What is the revenue function for fee-for-service payments per diem?

Answer 15

Σ^N _i=1 x_itp_t

N - number of patients treated
t - time
x_it - quantity of each medical service per day
p_s - price per service

Question 16

What is the revenue function for block contracts?

Answer 16

Σ^BC_bc=1 E(X_id)p_d

BC - number of block contracts the hospital enters into
E(X_id) - expected number of patients to be treated in a department
p_d - price paid for the typical patient in the department

Question 17

What is a global budget?

Answer 17

When only entering into one block contract

Question 18

What is the revenue function for casemix payments?

Answer 18

Σ^J_j=1 x_ijp_j

j - type of patient
x_ij - actual number of patients allocated to DRG
p_j - prospective price per patient type j

Question 19

In which payment type is the hospital a price taker?

Answer 19

Casemix since price is based on yardstick competition

FFS and block contract the hospital has some control over prices via negotiation

Question 20

Shleifer 1985

Answer 20

Created the theory of yardstick competition

• Aims to reduce informatio asymmetry; hospitals know more about the cost of production and the MoH doesn’t know how much effort they exert
• Principal sets the reward based on: hospitals own cost and the cost of other hospitals providing similar services in similar circumstances
• Principal’s tasks
  1. Collect cost data; from sample/all hospitals
  2. Define similar services; use DRGs
  3. Define cimilar circumstances
  4. Assess relative costs; comparative analysis

Question 21

What are the pros and cons of line item budgets?

Answer 21

Pros
- very tight control of expenditure

Cons
- no incentive to reduce costs since these will lead to future budget reductions
- incentive to employ resources that will lead to budget increases (e.g. more beds in Bishkek)
- no incentives related to volume, type and quality of treatment

Question 22

What are the pros and cons of FFS?

Answer 22

Pros
- strong incentives to treat more patients and do more for them

Cons
- no incentives for hospitals to control costs
- fee schedule to control item price not volume
- utilisation reviews are costly and don’t work
- payers try to pass on costs as higher insurance premiums or exclude high-risk groups

Utilisation reviews - someone reviews clinical notes to make sure hospital treated patients right, but hospitals always have an excuse

Question 23

What are the pros and cons of block contracts?

Answer 23

Pros
- expenditure control

Cons
- may not forecast costs correctly
- patients may be atypical
- little incentive for hospitals to do more work (encourages waiting lists)

Question 24

What are the pros and cons of casemix funding?

Answer 24

Pros
- equal pay (yardstick) for equal work (DRG)
- encourages efficient use of resources

Cons
- might encourage gaming (cream skimming, cost shifting, upcoding)
- cause regional variation in services if cost to hospital is greater than the average. They will stop offering that service

Question 25

Which payment model is best for increasing activity?

Answer 25

FFS

Question 26

Which payment model is best for cost control?

Answer 26

Very strong - line item budgeting
Strong - block contracts

Question 27

Which payment model is best for efficiency?

Answer 27

Casemix

Question 28

Which payment model is best for quality?

Answer 28

FFS