financing of health care

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methods of payment for primary health care providers ... facilities: global budgeting, line item budgeting, per diem and case-based .... professionals for their labour at PHC level are: fee-for service, capitation and .... It means that the global budget .... payment and other retrospective methods of payment provides no direct.


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Payment Methods and Regulation of Providers

Author(s), degrees, institution(s)

Doncho Donev, MD, PhD Institute of Social Medicine, Joint institutes, Medical Faculty, University of Skopje 50 Divizia no.6, 1000 Skopje, Republic of Macedonia Luka Kovacic, MD, PhD Andrija Štampar School of Public Health Medical School, University of Zagreb Rockefeller St. 4, HR-10000 Zagreb, Croatia

Address for correspondence

Doncho Donev, MD, PhD Institute of Social Medicine, Joint institutes, Medical Faculty, University of Skopje 50 Divizia no.6, 1000 Skopje, Republic of Macedonia Tel: +389 2 3147 056; Fax: +389 2 3163 866 E-mail: [email protected] resource allocation, health payments; regulation of providers; budgeting; feefor-service; capitation; case-base payment, diagnosis related groups, resource allocation reform, Europe, South Eastern; health planning At the end of this module students and health professionals should be able to:  identify resource allocation mechanisms and payment methods for regulation of providers  methods of payment for primary health care providers  payment and regulation of hospitals and other health facilities Allocation mechanisms and provider payment methods refers to the ways in which money are distributed from a source of funds to an individual provider or to a health care facility. There are three main methods for payment for doctor's services: fee-for-service, capitation and salary payment; and four basic methods for payment and regulation of hospitals and other health facilities: global budgeting, line item budgeting, per diem and case-based payment (DRGs). Each method for payment to providers has its own specificities, strengths and weaknesses, and each may be appropriate alone or in combination with other, which depends on various circumstances and environment.

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Keywords Learning objectives

Synopsis (Abstract)

Teaching methods

Teaching method will include combination of introductory lectures, group work and discussion followed by group report presentations and overall discussion, as well as practical individual work assignment

Specific recommendations For teacher

This module to be organized within 1 ECTS credit. Beside supervised work, students, as a practical work assignment, should collect some specific indicators (HFA Database and other sources) and to prepare a seminar paper about the allocation mechanisms and payment methods to providers in their respective countries.

Assessment of students

The final mark should be derived from assessment of the theoretical knowledge (oral exam), contribution to the group work and final discussion, and quality of the seminar paper


PAYMENT METHODS AND REGULATION OF PROVIDERS Doncho Donev, Luka Kovacic Resource allocation and provider payment methods in the health care system can have impact on provider’s behavior, and therefore on the achievement of the objectives of the health care system (efficiency, equity, cost containment). The allocation of financial resources should reflect the outcomes achieved, and include incentives for improveing the quality of care (1). Provider payment method refers to the way in which money are distributed from a source of funds, such as the government, an insurance company or other payor, (all also referred to as fund-holders), to a health care facility (hospital, PHC centre etc.) or to an individual provider (physician, nurse etc.). Each provider payment method carries a set of incentives that encourage providers to behave in specific ways in terms of types, amounts, and quality of services they offer (2). It means that the payment system should be directed to provide the right incentives (or disincentives) in order to promote (or discourage) certain types of behaviour, and therefore to improve the efficiency and the quality of health services and to provide equitable financial access to care with the use of existing resources effectively. It is not easy to develop payment system and to provide right incentives (or disincentives) and to measure related performance. In general, health outcomes are problematic to measure, and may not be directly attributable to the performance of the individual health care provider, but rather to their team or other determinants of health status. It is also difficult to measure the behavioural response of providers to changes in payment systems (3). Provider payment reform is often linked to government efforts to improve the efficacy of the health care system through various means, among others: 1) decentralizing the management of the health system; 2) separating health financing functions from the institution providing care; 3) contracting for public health services with private sector providers and non-governmental organizations; 4) developing or reforming public or private health insurance to expand coverage of the population; 5) promoting primary and preventive


3 care over reliance on expensive curative and hospital-based care; and 6) improving hospital management and quality of care (2). Incentives and disincentives for efficient care include how providers and facilities are paid, and how services are organized.

Resource allocation according to needs The evidence suggests that a strategic approach to resource allocation and prioritysetting is needed, in order to coordinate decision-making at different levels, and this should start with a discussion and a decision on the values and principles to be applied when determining need and selecting priorities. A debate (involving government, health service and care providers, the public and patients) on the ethical, political and social questions that need to be addressed must precede any decision on the rationing of resources. The term "funding" is used to describe allocating the revenues, that have been already raised, to health care organizations and to alternative activities within the health care sector, usually through budgets or payments to providers, public not-for-profit and for-profit institutions and firms (3). Any rationing of access to necessary services should be preceded by a thorough scrutiny of the overall organization and of the cost and effectiveness of the services and care provided. Needs-based resource allocation formulae have been introduced into some countries in the western part of Europe and are now being developed in some countries in the eastern part, in particular regarding the geographical allocation of resources and services. Contracting is a mechanism that offers an alternative to traditional models of resource allocation, binding third-party payers and providers to explicit commitments and generating the economic motivation to meet these commitments. Four major reasons have been put forward for introducing contractual relationships into tax-based systems, based on the long experience of health insurance systems: 1) to encourage decentralization; 2) to improve the performance of providers; 3) to improve the planning of health service and care development; and 4) to improve management (2). Contracts can support equity if, through needs assessment, resources are allocated as a priority explicitly to disadvantaged population groups. The role of governments should be 3

4 to ensure equity, in order to avoid over-emphasizing profitable, rather than effective, services.

Basic Arrangements for Resource Allocation There are three different basic arrangements by which to distribute revenue to health care providers: 1) the reimbursement model; 2) the contract model; and 3) the vertically integrated model. Combined, there are thus at least seven major payment methods or alternative ways for payment to health care providers (4).

Payment for Primary Health Care (PHC) Providers Payment system for PHC providers should contribute to achievement of the best possible health outcomes. An optimum payment system for PHC providers should also ensure the following: financial management of the different components of PHC within a country’s total health care expenditure; a balanced package of health promotion, disease prevention, treatment, and rehabilitative services; a free choice of health care provider for all individuals; a structure of fair rewards for practitioners which recognizes workload and professional merit; acceptance of health care providers’ responsibility for and accountability to the population and responsiveness to the needs of the community, the family and the individual; promotion of close collaboration among health care providers; and a democratic system of decision-making. Finally, the system should allow purposeful, flexible management aimed at achieving continuous quality development and greater costeffectiveness (1). The main methods of remuneration or paying doctors and other health care professionals for their labour at PHC level are: fee-for service, capitation and salary, or some combination of these methods. Each of them has its historical roots, advantages and disadvantages, and the incentives they create for providers, payors and consumers (1, 5, 6). 1. Fee-for-service is payment for each unit of service or intervention provided (visit to doctors office for counselling, testing or treatment prescription, intervention or surgical procedure), which can be paid directly by the patient (user charges) or by the third party


5 payer (insurer or government). Fee-for-service is a common method of payment for doctor’s services in many countries, such as Germany, U.S.A., Canada and other countries (5, 8). In most countries fee-for-service payment is regulated by a prospectively fixed fee schedule, negotiated by the fund-holders and the provider’s representative. Because of incomplete information and so called information asymmetry as a result of superior knowledge of the health care providers, doctor helps the patient to make choices and patient may be unable to judge the performance of the doctor, before or even after the intervention. Disadvantage of this method of payment is that provider might neglect codes of medical ethics in protecting the consumer’s best interests and to influence patient’s demand for health care, especially for more expensive kinds of care, including surgery, for the providers’ own self-interest (income). This creates potential incentives for inappropriate services and over-treatment (over-servicing), in excess of real needs, especially when the patient is fully covered by health insurance and when the specific actions undertaken by the physician cannot be monitored, measured, or well understood. That is known as supplier induced demands. Fee-for-service and other retrospective forms of payment result in an input-intensive, gold-plated form of service that often extensively expends resources. On the other side, fee-for-service method of payment discourages provision of care not defined as a service in the fee schedule (because a "covered" service is the unit of payment), (3, 6, 7). Some fund-holders introduce participation of the user in the cost of service (user fees or charges), which is called co-payment. In fact, co-payment is the portion of covered health care cost for which the person insured has the responsibility to pay, usually based on a fixed percentage. The method of co-payment is a regulative mechanism for rationing the health care, in order to prevent consumers to seek unnecessary care, as well as a source for additional funds for health care (financial input). Co-payment often is an issue for political debate (hot potato) because the opponents argue that user fees affect the poorer strata of the population disproportionately and discourage preventive care services/activities (3, 5). Case-based payment to physicians at primary level is not common, but might be popular prospective form of payment for specialty physicians and for hospital outpatient services builds on the episode-of-illness payment methodology. That is payment per caserates or episode of illness i.e. for obstetrical care as a complete service including prenatal care and delivery, or certain surgical, cardiological etc. package of care over an illness or 5

6 period of care, usually on a monthly basis (fee for the preoperative/pre-intervention workup, the procedure itself, and postoperative monitoring), (5, 6). 2. Capitation for doctor’s services is advanced payment by a fixed sum of money for the persons registered for care with the physician for a defined period of time. It means that capitation is prepayment for services on per member pre month (pre year) basis by some amount of money every month (year) for a member regardless of whether that member receives services and regardless of how expensive those services are. This method of payment provides good cash flow, less lost-costs and applied and good case management, and can be for a comprehensive health services or for general practitioner services. In the UK, for example, around 60% of general practitioners’ income is derived from an annual fee paid by the National Health Service (NHS) for each patient on a GP’s list. The costs might be predicted because the fee depends on the age and sex of the patient (age/sex adjustment of physician capitation rates), and the level of the deprivation of the area. Capitation payment put risk on provider and has the advantage for utilization control because it does not contain incentives for provider to over-treat the patient. There is some incentive for the doctor to maintain quality of care in order to attract and retain patients even this is limited by information problems. Providers are also motivated to undertake health promotion and preventive care as this may reduce costs later in the health care process. In UK recently were introduced incentive fees for full immunization and screening programs in order to improve the performance in these areas. Main weaknesses might be to adjust capitation payment adequately to reflect the diversity in disease severity among patients, which leads to incentives for adverse selection and patient dumping, difficulties to determine break-even point (volume), avoiding high-risk and high-cost patients or reducing treatment for them, inappropriate under-utilization (narrow scope practice), and misunderstanding of the meaning of capitation by provider. There may be incentives to under-treat (subject to keeping patients happy and therefore retaining them), and to shift costs to elsewhere in the health care system (for example from primary to secondary care). The interaction among payment mechanisms (capitation at primary level and fee-for-service payment at secondary level) might provide incentive for over-referral and convert primary care physicians into triage agents (3, 5, 6). 3. Salary payment for doctors and other health workers is the final payment mechanism in form of salary where doctors are paid to provide a certain amount of their time to carry out specified responsibilities for an organization and to perform a defined role, 6

7 usually being available to provide needed health care services at specified times (and places). The salary level is likely to be negotiated between the professional associations (or Health Workers Trade Unions) and fund-holders (Government, insurance company or managed care organization), and will vary according to the age, experience, grades or levels of education and responsibilities of the health workers. The advantage for providers is predictability and stability of income, and it gives less incentive to over-treat, but may contain incentives to under-treat or shift costs from primary to higher levels. In addition, a hospital doctor paid a salary may choose, with a given availability of beds, to have a longer average length of stay (reducing overall workload) rather than faster throughput (which would increase work without increasing income. In general, salary payment undermines productivity, condones on-the-job leisure and fosters a bureaucratic mentality. It means that provider might consider that every procedure is someone else's problem because payment is based on minimally meeting responsibilities (to retain one's position), (3, 6, 7). That is why salary payment is often combined with incentive payments for additional services. Wage is a payment mechanism whereby a provider receives a pre-specified sum of money for each hour of work they provide to an organization. It can be used only for remuneration. Although the wage is normally pre-set, the total payments depend on the number of hours worked. The incentives are similar to salary, except that payment is even more closely tied to time spent at the workplace (7). The type of payment system depends of the financing of the health care system and the public-private mix of financing, as well as of the provision and the desired activity levels of physicians and other health workers. Payment systems are therefore likely to involve a mix of methods. Increasingly mixed systems of payment are emerging, with capitation as a predominant method at the primary health care level (5).

Payment and Regulation of Hospitals and other Health Facilities There are four main mechanisms for paying hospitals and each of them create different incentives for the service provider and different effects in relation to the objectives of equity, quality of care, efficiency and cost control/ cost containment (3, 5).


8 It is not easy to measure efficiency and outcomes of health care in the hospital sector. Efficiency should be measured through input (resources used in delivering care), process (method of delivering care, day cases and inpatient cases, length of stay etc.), and outcome indicators (the result of care – whether or not it has been of benefit to the patient). Measuring outcomes of health care is often attempted to estimate process and hospital activity through some indicators (average length of stay, bed occupancy and turnover rate), which have uncertain relationships with cost, patient outcomes and efficiency. If activity measures are used in payment systems for providers, they should be good proxies for outcome. Rewarding turnover of patients may give incentives for discharging patients “quicker but sicker”. Nevertheless, too many indicators can create confusion and dilute incentives. Prospective budgeting has evident merits: it limits expenditure to funding a given level of service provision that is determined in advance for a defined period. A prospective budgeting system can be recommended if it incorporates the use of case-mix controls and output measures. Classification systems based on diagnosis or on the characteristics of the patients can be used to better analyse cost structures, evaluate hospital performance and quality of care, and make comparisons between hospitals in terms of costs and quality, as well as in negotiating contracts between hospitals and those purchasing services. Alternatively, a volume-based approach can be made to work by using prospective pricing and contracting or planning agreements for agreed levels of service provision. In this way, hospitals can be obligated to achieve specific objectives of cost control and effective resource utilization, stimulating them to review and adjust their current organization, staffing levels and internal resource allocation (1, 3). 4. Global budgeting is defined as a total payment, almost always prospectively, fixed in advance as a constraint on providers to limit the price and the quantity of service, to be provided in a specified period of time. Global budgets are difficult to amend over the budget period, but some end-of-year adjustments may be allowed. It means that the global budget becomes a financial plan (and resource constraint) within which the hospital or other health facility has to operate. Resource allocation decisions are made among the many diverse, but interdependent activities and programs of the health care providers. The global or operating budget is always for a specified period, usually one year (calendar or fiscal), although it might be a biennial or a semi-annual budget (5, 7, 8). 8

9 Various formulas can be used for establishing a global budget for a hospital or other health facility. Because global budgets do not contain incentives for good performance, it is important to specify either the volume of activity or the price of each of the services included within the budget. In order to prevent the provider to minimize the number of patients treated and the amount of care given to each patient, since the money received will be the same, it is necessary to determine the scope of services included, patients eligible for treatment and methods of care delivery (i.e. inpatient, outpatient, day case, diagnostic testing). The global budget may reflect the anticipated volume of activity and services derived from the utilization rates for the previous year or to be based on per capita rates with various adjustments (age, sex). Global budgeting usually relates the level of resources provided (the budget) to the level of activity to be undertaken, and is therefore focused on inputs and not on outputs. Because the determination of the process of delivery of care is left to the provider, who tends to maximize profits (by undertaking the required activity for easy cases as cheaply as possible, with potential for cost shifting and the quality to be compromised), additional regulation is needed for quality to be maintained and clear quality standards to be specified by global budgeting agreements/ contracts between purchaser and provider. The global budget can include also some capital costs if necessary to built/ broaden or renovate the capacities or purchase some capital/ costly equipment (3, 5, 9). The main advantage of a global budget for cost-containment is that the cost paid by the fund-holder/ purchaser is fixed, and therefore the financial risk is transferred to the provider, assuming that there are “good” and well-constructed activity targets. The advantage for local managers is flexibility about the use of resources and the methods of undertaking care within the budget limits. Disadvantage of global budgets is that it provides incentives to skim on quality of care, engage in risk-selection, and provides few incentives to improve micro-efficiency despite helping contain costs. There is no control of quality inherent in global budget framework. Furthermore, global budgets provide incentives for hospitals to avoid complicated cases and seek out simple ones. In order to address these problems, activity targets including expected case-mix is important (3, 7). 5. Line Item Budgeting is a variant of global budgeting with subdivision of the budget allocated according to specific input categories of resources or functions (salaries, medicines, equipment, food, maintenance etc.). This method of hospital budgeting process and contracting methodology is generally similar to that for global budgeting, but more complex 9

10 and more difficult to monitor with much more details, since each item of expenditure might be subject to an individual contract and possibly a service specification (3, 5, 7). Initial step of the budgeting process is gathering retrospective data and financial information including all expenses and revenues, units of services (case mix index), staffing information including a breakdown by job code and type of working day-time hours (e.g. base staffing, overtime, non-productive), and current year projections with detailed analysis and evaluation. The second step relate to determining the units of services and expected changes in number of patients, which is driving force for changes in both revenues and certain types of expenses. Special attention should be paid to the inpatient routine units of services – patient days, discharges (or admissions), adjustments for intensity of care, as well as to ancillary units of services. The third step of the budgeting process relates to staffing and payroll, which is the most important, high time-consuming and the single largest portion of the budget. Special attention should be paid to the base staffing and payroll, overtime, other budgeted hours, contract codes, pay increases, occurred vs. paid staffing and payroll, and productive vs. non-productive time. The next separate category of the budget are the fringe benefits (social security, pension and retirement, health insurance, disability, unemployment and life insurance, tuition reimbursement etc.). Special category of the budget is non-salary fixed and variable expenses (medical/ surgical suppliers, drugs and pharmaceuticals, general suppliers, professional and physician fees, insurance, interest and depreciation, purchased services, travel costs, and utilities. And, the last category of the budget are revenues and allowances: gross and net patient revenue, rate charges, allowances and deductions from revenue, contractual allowances and other operating and non-operating revenue (3, 5, 7). Line item budgeting, in general, offers similar incentives as global budgeting, with an exception with limited or no possibility of reallocation of resources between cost units/ categories. That might be a limitation for hospitals for efficient methods of service delivery because of few incentives for efficient production of health services, and little flexibility of managers (2). Advanced budgeting, as an alternative method of variance reporting and adjustment of revenues and expenses based on increases or decreases in unit services, is more flexible budgeting. Reports on advanced budgeting cover flexible budget as compared to actual and fixed (static) budget. Main strengths of advanced budgeting are that budget can be adjusted in order to reflect actual activity level, it is easier to obtain meaningful variance analysis, and to generate a more enthusiastic acceptance by department managers. 10

11 In line item budgeting the recurrent (operational) costs should be separated from capital costs, too. 6. Per diem or flat rate per patient-day is retrospective method for payment of hospital activity. This method, as well as other retrospective methods of payment (fee-for-service or per procedure, course of treatment, per admission or cost-per-case based payment) encourages hospitals to maximize income by maximizing the volume of activity. Per diem method gives incentives to hospitals to increase the number of admissions to hospital for diagnostic tests or care that could be provided in alternative and less costly ways (ambulatory or day care services), to hospitalise and provide prolonged care for a relatively well patient and to avoid or refer the sicker patient to other hospital/university clinic (cost shifting), or to prolong length of stay, particularly as the cost per day of care declines as length of stay increases (3, 7). Fee-for-service payment for each service, procedure or course of treatment in hospitals, as well as cost-per-case based payment (per admission), favours unnecessary marginal care, long lengths of stay, high admission rates, and provision of duplicative or unnecessary services (5). Per-diem payment and other retrospective methods of payment provides no direct incentives to ensure quality of care, efficiency and cost-containment. 7. Diagnosis Related Groups (DRGs) is prospective method for payment of hospitals by predefined charge per case, within the payment rates for each type of case being determined in advance. Patients/diagnoses should be categorized into disease categories, so called Diagnosis Related Groups, in order to facilitate billing and reimbursement by estimate cost of individual treatment. Reimbursement rates are negotiated between purchaser and provider and they are set to reflect the expected average cost for particular DRG. Reimbursement payments are divided into four major components: 1. room and board, 2. professional service, 3. diagnostic tests and special therapies, and 4. consumables and drugs (5, 7). The number of DRGs vary from 470, or even more, in USA (introduced in early 1980s for Medicare Program for elderly) to around 20 diagnostic groups in Chile, which greatly simplifies the classification process and accounting around 60 percent of inpatient care expenditures. The remaining 40 percent of procedures are covered under management 11

12 contracts and prospective budgets. During 1990s this method of prospective payment to hospitals was introduced in Norway (1991), Sweden and Ireland (1992), Hungary (19871993), United Kingdom (1993), Italy (1994), Germany, Belgium and Spain (1995), Czech Republic (1996), and than in some other countries (Canada, Denmark, Australia and Philippines). Anyhow, for implementation of this method of payment should be available a reliable patient information system in order to record diagnoses, procedures, and important items of resource use such as diagnostic testing and length of stay (3, 5). DRG payment method has advantages of reducing incentives to over-treat, permitting cost containment and generating data and information. There are also some limitations and adverse effects in using DRGs payment method: 1) incomplete coverage of DRGs (they do not cover psychiatry, outpatients or physician fees for the uncovered items); 2) promoting technological changes (day case surgery), which might be beneficial but in many cases are with unproven efficiency; 3) sticky prices, once fixed, are difficult to change, regardless of advances in technology and falling unit costs, and therefore offer providers increasing profits over time; 4) DRG creep - activity of classifying patients into the most remunerative DRGs possible through undertaking additional diagnostic tests and identifying additional health defects and problems; 5) data requirements can limit the use of DRGs in countries with insufficiently developed health information system, particularly in developing countries (3, 7). The main objective of DRGs prospective payment is to control costs by motivating providers to deliver care as cheaply as possible. Hospitals have incentives to improve performance and to reduce expenditure by reducing length of stay, cutting out unnecessary tests and avoiding duplication. The tendency of hospitals to reduce costs sometimes may compromise the quality of services provided and health outcomes to be worsened, i.e. earlier discharge could lead to higher rates of mortality, morbidity and readmission to hospital – a “quicker – sicker” problem. DRGs with fixed prices across all providers stimulate competition based on non-price factors, notably on the quality of services, short waiting times and the quality of he hospital environment. Quality competition is likely for profitable patients, i.e. those whose treatment is expected to cost less than the DRG reimbursement level. Perverse incentives for providers appear when case-mix selection is allowed and hospitals may select the patients they treat. It means that hospitals have incentive to avoid and not to treat patients who are older, sicker or more likely to have complications because 12

13 the treatment costs for them will probably be in excess of the DRG average (adverse selection). Such hospitals would prefer to treat simple cases and to minimize costs and maximize profit (cream-skim phenomenon), (3, 5, 7). Case mix selection can occur if providers are allowed to select the patients they treat. This is important because even within DRGs, some patients may be older, sicker, or more likely to have a treatment cost in excess of the DRG average. If payments are made on the basis of DRG average cost, profit-maximizing hospitals have an incentive not to treat these patients. Such hospitals would prefer to cream-skim treating simple cases, minimizing costs and retaining any excess of income over expenditure. To avoid cream skimming there must be adequate case-mix adjustment within DRGs, which can be complex. Case-mix can be measured based on patient's diagnoses or the severity of their illnesses, the utilization of services, and the characteristics of a hospital. Case-mix influences the average length of stay, cost, and scope of services provided by hospital (3, 7). Conclusion There are three main methods for paying doctors: fee for service, capitation and salary, and four main methods for paying hospitals: global budget, line-item budget, per diem and case based payment (DRGs). The practice shows that there is no ideal method for payment of providers. Resource allocation decisions should be made among the many diverse, but interdependent activities and programs of the health care providers, and because of that the reimbursement or budgeting is a complex process, usually involving input from many sources. Anyhow, the creation and maintaining of a detailed operating budget is an important component of cost control. It means that each method for payment to providers has strengths and weaknesses, and each may be appropriate alone or in combination with other, which depends on various circumstances and environment. Nevertheless, many health care systems have moved away from fee-for-service as predominant payment. Mixed payment systems, with a prospective component based on capitation together with fee-for-service for selected items, seem to be more successful in controlling costs at the macro level, while ensuring both patient and provider satisfaction and achieving efficiency and quality at the micro level. The tools available for management include the use of different incentives to influence patterns of care (e.g. to offer more preventive services) and ensure equitable distribution of primary care providers throughout the country (1, 9, 10, 11, 12). 13

14 Reimbursement of the hospital providers is complex, and depends on specialization or complexity of hospital services. For example, to use a global budget might be appropriate for well-defined care, such as maternal services. But, when services are more complex and variable, such as oncology or trauma, payment through global budget might be less appropriate. Choice of payment method for health care providers is a long, complex and detailed process including appropriate devising of incentives and contract specifications in order to achieve health care objectives (efficiency, quality, equity and cost-containment, as well as consumer satisfaction. Difficulties in selection of the method for reimbursement of providers are springing out from the specific subject and product - thousand of different illnesses and treatments, and, for the same illness, treatment patterns can be substantially different for different physicians and providers. From the other side, the quality of health care services and outcomes is very difficult to quantify and measure. Projection of net revenue is difficult to determine because of different payors and payment methods, and because of rapidly changing of payment methods. When a third party payor (insurance agency) contracts with providers to pay for the care of covered patients by health insurance, it is recommended for each of the payment methods to be accompanied by some payment out of pocket of the patient (1-3, 5, 9). Each payment method should be supported by legal framework and management information system, effective referral system, and financial and management autonomy of the providers. The main characteristics and differences, as well as the distribution of the financial risk between payors/ purchasers and providers, are summarized in the attached table 1 (2, 3, 6, 7).

EXERCISE: Financing of Health Care and Regulation of Providers Seminar Paper: Students should use additional recommended readings in order to increase their knowledge and understanding of allocation mechanisms and payment methods for regulation of providers. As output, students should write a seminar paper, stressing the importance of different payment methods for regulation of providers. Students ought to be able to investigate the ways in which revenues are pooled and how they are distributed to health providers (much more could be find at local level). 14

15 R e f e r e n c e s: 1. WHO. Health 21 – Health for All in the 21st Century - Funding and allocation of resources for health services and care. European Health for All Series No 6. WHOEuro, Copenhagen 1999: 131-5 2. Wouters A, Bennett S, Leighton C. Alternative Provider Payment Methods: Incentives for improving Health Care Delivery. Partnership for Health Reform Primer. 3. Maynard A, Bloor K. Payment and Regulation of Providers. Flagship Course on Health Sector Reform and Sustainable Financing Background Material. The World Bank Institute and Semmelweis University Health Services Management Training Centre, Budapest, Hungary, June 30 - July 11, 2003 4. Saltman RB, Figueras J. European Health Care Reform: Analysis of Current Strategies. WHO Regional Office for Europe, Copenhagen, 1997 (WHO Regional Publications, European Series, No. 72). 5. Tulchinsky TH, Varavikova EA. The New Public Health: An Introduction for the 21st Century. Chapter 11: Measuring Costs: The Economics of Health. San Diego: Academic Press, 2000:549-88 6. Robinson J. Theory and Practice in the Design of Physicians Payment Incentives. The Milbank Quarterly Journal of Public Health and Health Care Policy. University of California, Berkeley, 2001; 79(2) URL:

Accessed: June 29, 2003 7. The World Bank Group. Funding and Remuneration in Health Care. Distance Learning Flagship Course on Health Sector Reform and Sustainable Financing, 2001. URL: Accessed: January 14, 2004 8. Anthony N. Robert, Young W. David. Management Control in Non-profit Organizations - Fifth Edition. Richard D. IRWIN, Inc., Bur Ridge, Illinois, USA, Sydney-Australia; 1994:902 9. WHO. Health Systems: Improving Performance. The World Health Report 2000, WHO, Geneva, 2000:47-116 10. WHO. Shaping the Future. The World Health Report 2003 - Financing Health Systems. WHO, Geneva, 2003:119-21 11. The World Bank. World Development Report 1993: Investing in Health. The World Bank, 1993:25-71 12. Bobadilla JL, Cowley P, Musgrove P, Saxenian H. Design, Content and Financing of an Essential National Package of Health Services. The World Bank Group Private and Public Initiatives: Working Together in Health and Education. The World Bank, March 17,1995:1-10 ( Accessed Jan. 11, 2004)


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