Provider Payment Systems

1. Provider Payment Systems Senior Policy Seminar Bangkok, Thailand February 28 – March 1, 2007 George Schieber Health Policy Advisor Human Development Network

2. Key Messages There is no ‘right’ method Provider payment systems must be tailored to the institutional realities of each system encompassing both the demand and supply sides 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 Policy-makers must monitor the effects of alternative provider payment systems on cost, access, and quality – MIS is critical

3. Thailand Financing System Source: Tangcharoensathein and Pitayarangsarit, 2003, Wibulpolprasert, 2007.

4. Provider Payment in UC Source: Jongudomsuk

5. Organization 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

6. Definitions, Importance, and Goals of Provider Payment Systems

7. Objectives 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

8. Assumptions 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

9. 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.

10. Provider 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

11. The ‘New’ Focus – P4P – Pay for Performance • “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

12. Basic 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

13. Some Basic Measures for Family Physicians • 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.

14. Focus on HNP results (outcomes/outputs) – Paying for results in Argentina ARGENTINA – Output-based Lending Trazadora Results (Apgar Score)in three of the 9 poorest provinces • 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 Proportion of eligible births with Apgar score > 6 at minute 5, by province and quarterly targets, May 2005 – August 2006 Source: Argentina Provincial MCH Project

15. Source: VHA

16. Provider Payment Systems are One of Many 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

17. Provider 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

18. Provider Payment and Health Systems Source: David Peters, World Bank 2006

19. What Do We Mean by Efficiency

20. Efficiency 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

21. 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 Demand and Supply Side Approaches for Improving Efficiency of Service Use Source: M. Henscher

22. Factors Affecting Feasibility of Efficiency Improvements Source: Hensher, CMH

23. Expenditure = Income H O U S E H O L D S General taxation P R O V I D E R S capitation payments social ‘insurance’ fee per item of service HEALTHCARE BUDGET private insurance salaries user charges/ copayments from Reinhardt 1984

24. Flows of Funds to Medical Care Providers PUBLIC AND PRIVATE ‘INSURANCE’ PROGRAMS PAYMENTS FOR SERVICES DIRECT PROVIDER REIMBURSEMENT APPROACHES AND CONTRACT ARRANGEMENTS INDEMNITY MODEL METHOD, UNIT, AND LEVEL OF PAYMENT HAVE INCENTIVES FOR PROVIDERS THAT AFFECT: TYPE, NUMBER AND QUALITY OF SERVICES PROVIDED PROVIDERS OF CARE PATIENTS FLOW OF SERVICES

25. Incentives To ProvidersDepend 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

26. Need To Monitor • Costs • Quality • Access • Impacts across different provider types • Impacts across all public and private payors including those paying out of pocket

27. Difficult to Control Spending Without a Single Set of Payment Rules DELIVERY SYSTEM PUBLIC FACILITIES AND PHYSICIANS PRIVATE FACILITIES AND PHYSICIANS BUDGET FEE SCHEDULES CHARGES SOURCES OF INSURANCE COVERAGE PRIVATE PUBLIC UNINSURED

28. Where Do We Start – National Health Accounts

29. Table 1: National Health Expenditures Aggregate and Per Capita Amounts, Percent Distribution, and Average Annual Percent Growth, by Source of Funds: Selected Calendar Years 1960-2004

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

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

32. Source: VHA

33. Observations From a Big Spender – The United States

34. Health System in USA Hospitals & Doctors INSURANCE COMPANIES GOVERNMENT Emergency Room Employer Chooses Medicare Medicaid No care Employers Benefits Dept. Elderly Poor Insured through employer Self-insured Uninsured

35. Observations 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

36. Observations 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

37. Observations 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

38. Development of Payment Systems --Physicians, Hospitals, Pharmaceuticals

39. Paying 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)

40. Fee 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

41. Fee For Service Incentives • 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

42. Fee 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)

43. Salary • 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

44. Salary 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

45. Salary 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

46. Capitation • 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)

47. Capitation 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

48. Payment Mechanisms for Physicians, Financial Risk and Incentives Source: Maynard and Bloor

49. Hospital 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

50. Hospital 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