Paying Providers

Question 1

Main problems in purchasing healthcare

Answer 1

Information Asymmetry (here, particularly between providers and payers) causes:

1. Adverse Selection: in a market where people can opt into or out of insurance
2. Patients and providers’ moral hazard: maximising activity by providers to enhance income, or consume more since patients do not directly pay for service
3. Overproduction or underproduction because of the moral hazard
4. Uncertainty over quality: we use financing mechanisms to create incentives over how providers deliver care
5. Difficulties in contracting because difficult to see how providers delivering care and therefore fulfilling their contracts
6. Gaming and fraud: because so much activity is unobserved. Importance of collecting data

Question 2

Purchasing healthcare objectives

Answer 2

1. Control Costs: especially when prices are being freely negotiated, considering how effective competition is in healthcare, costs can get out of control, so not only costs in terms of volume but also the actual price paid
2. Improving technical efficiency: Improving quality without impacting costs, or decreasing costs without impacting quality
3. Improving Quality: by creating financial incentives that drive providers into competition over quality, or link their payment in some way to the quality they deliver

Question 3

Key questions

Answer 3

Who is at financial risk? To control costs, we want to shift the risk from the insurer onto the provider.

As a consequence, they should be aware that providers might want to shift their financial risk onto the patient by limiting access to certain patients and care, refusing treatment, or reducing the quality of service.

Quality implications, leading to the question of Who is at risk of not receiving care?

Question 4

Market Models

Answer 4

Canada and the UK: They try to create an internal market by separating providers from insurers and regulators. They also “Denationalise” Primary care, where GPs are self-employed but contracted to provide public services. The goal is to create competitive tension and limit the role of government.

US: Some insurers own networks of providers; they are directly integrated. The idea is to reduce price spirals in the provider sector in particular and create limitations in terms of patient choice (mitigates the effects of competition in the HC market). The goal is to create greater accountability, shared between insurers and providers.

NL: Independent, so there is competition between providers and insurers to limit cost.

Question 5

Implication of the system structure

Answer 5

(Ouchi W 1979)

• Hierarchy: governance means defining rules, allocating resources and responsibilities, with the implication of top-down control, monitoring processes (salary, budgets, activity-related payments)
• Market: governance emphasises competition, purchasing, regulation and creating incentives, measuring outputs and outcomes (activity-related payments )
• Network: decentralised governance, need to establish common goals and values, ensure systems, capacity and knowledge are in place to encourage collaboration (UK moving towards)

Question 6

Types of Provider Payments

Question 7

Dimensions of provider payments

Answer 7

• Payment objective: costs, productivity/efficiency, quality
• Type of payment: organisation, service or patient
  - If you want to control cost, target the payment to the whole organisation.
  - if you want to incentivise productivity, then target the service, and control the price of individual services.
  - if you want to incentive outcomes, focus on the patient,
• Breadth of payment: narrow or broad
• Allocation of financial risk: purchaser or provider
• Timing of payments: prospective or retrospective
• Size of payment: large or small, fixed or variable

Question 8

Case-mix payments and DRGs

Answer 8

Provider is paid a fixed amount per case, by a third-party payer, regardless of the actual types and quantities of services provided

Based on the concept of:
- Diagnostic Related Groups (DRGs) (Fetter et al. 1980)
- Yardstick Competition (utility sector) compare the cost between providers, and we pay the average cost (providers who have a higher cost than the national average have an incentive to reduce their costs to the average or below, and those already below will want to stay below.)

Underpinning Assumptions:
- Cost among cases should be as similar as possible (if big variation then not the appropriate payment method)

• Little heterogeneity within case groups
• Relies on accurate information on the characteristics of the patient (risk adjustment)

Question 9

DRGs - Yardstick Competition

Answer 9

• Setting national prices based on average cost means higher-cost providers are incentivised to improve efficiency/reduce cost (yardstick competition).
• Providers with below-average costs are incentivised to keep them below the average as they will retain the marginal difference.
• The fixed price means that providers are incentivised to reduce costs through improved efficiency
• A national efficiency factor could be incorporated in the payment system preventing the price paid from rising at the same rate as costs, so providers must continuously improve efficiency.

Question 10

DRGs Price setting