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Case-Based Hospital Case-Based Hospital Payment Systems:Payment Systems: Key Aspects of Design and Key Aspects of Design and ImplementationImplementation

Cheryl Cashin - USAID ZdravPlus Project/Abt Associates

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Why are Hospital Payment Systems Why are Hospital Payment Systems Important?Important?

The hospital inpatient sector almost always consumes the greatest share of health care resources

Therefore, the way hospitals are paid can have a particularly strong influence on the performance of the health care system as a whole

There are alternative methods for paying hospitals, all of which have a variety of strengths and weaknesses Some hospital payment systems may be appropriate at certain times in

a country; Most appropriate payment system may change over time Often most effective to use payment methods in combination

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Technical ConceptsTechnical Concepts

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Definition of Case-Based PaymentDefinition of Case-Based Payment

The health purchaser pays all hospitals in the payment system a fixed rate for each case that falls into one of a set of defined categories.

Payment rates can be defined as the global average cost for all hospital cases the average cost per case in each hospital department or the average cost per case in the patient’s diagnosis category.

The fixed payment rates are set for a group of hospitals, rather than for a single hospital Implementing a new payment system for a single hospital will not

achieve the goals of a new payment system.

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IncentivesIncentives

Economic signalsEconomic signals that direct individuals and organizations toward self-interested behaviorself-interested behavior.

Health providers respond to economic signals in payment systems to maximize the positive—and minimize the negative—effects on their income and other interests.

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What are the Incentives of Case-What are the Incentives of Case-Based Payment?Based Payment?

Reduce cost/improve efficiency of inputs, for example: Reduce total inputs per case Reduce length of stay Employ more nurses and fewer physicians Shift rehabilitation care to outpatient setting

Increase productivity--total # of cases (including unnecessary hospitalizations)

May have positive or negative consequences for patients, May have positive or negative consequences for patients, purchaser, and the systempurchaser, and the system

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Potential Goals of a Case-Based HospitalPotential Goals of a Case-Based HospitalPayment SystemPayment System Reorient health financing toward

reimbursing services for the population rather than infrastructure (buildings)

Create incentives for hospitals to deliver higher quality services using fewer or lower cost inputs

Introduce hospital competition and choice for patients or otherwise increase the responsiveness of the health system

Allow government funds to be used to purchase services from private hospitals

Improve the efficiency of resource allocation across hospitals, and between the hospital sector and other levels of care

Drive restructuring, and re-profile or close inefficient hospitals/departments

Improve the equity of health financing

Generate information for better management of the health sector

Increase hospital management autonomy (decentralization of health facility-level management)

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Why Case-Based Payment?Why Case-Based Payment?

Case-based hospital payment systems have been seen as a valuable tool in a wide variety of contexts for:

Reorienting provider payment from input-based budgets to paying for outputs, and

As a way to introduce efficiency incentives and competition into the hospital sector.

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Methodological IssuesMethodological Issues

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Components of a Per Capita Payment Components of a Per Capita Payment SystemSystem

Minimum components: the set of parameters for calculating the payment rates for

each type of case; and an administration system (information and billing system)

Case-based payment systems using diagnosis-based case groups also require an information system that computerizes the recording of cases by the hospitals and the grouping of cases into payment categories.

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Payment FormulaPayment Formula

iPayment per case BR *CGW x Oi hWhere,

Payment per casei = price paid by purchaser for cases in case group i

BR = base rate, or global average cost per case

CGWi = case group weight for case group i

Oh = other adjustors for hospital h

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Step 1: Define Case GroupsStep 1: Define Case Groups

Type of Case Grouping

Data Requirements Data Sources

No case grouping

Average cost per hospital case

Historical hospital budgets; statistical data; other hospital expenditure and utilization data

Department case grouping

Department average cost per bed-day; department lengths of stay

Hospital budgets and cost-accounting analysis; statistical data; other hospital expenditure and utilization data

Diagnosis-based case grouping

Department average cost per bed-day, department lengths of stay, and other characteristics of the hospital or case

Hospital budgets and cost-accounting statistical data; individual data on age, sex, ICD-9 or ICD-10 code for primary diagnosis, length of stay, surgery, and other characteristics of the case (such as intensive care)

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Diagnosis-based Case GroupingDiagnosis-based Case Grouping

Case groups bring together cases with both similar clinical characteristics and resource requirements for diagnosis and treatment.

A combination of statistical analysis and expert judgment

Iterations of: Combining ICD codes into groups Determining the cost distribution within the group Recombining ICD codes to improve the distribution (come

close to a relatively tight normal distribution)

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Step 1. Determine the structure of case grouping

Step 1.1 Create major diagnostic categoriesStep 1.2 Group cases into medical/surgical casesStep 1.3 Group cases into patient age groups

Step 2. Determine the cost distribution across ICD codes

Step 2.1 Determine the average cost per caseStep 2.2 Aggregate cases by ICD-10 codeStep 2.3 Remove outliers

Step 3. Merge clinical and economic criteria to determine case groups

Step 3.1 Create diagnosis-based case groupsStep 3.2 Calculate average cost per case in each case group

Steps in Diagnosis-based Case GroupingSteps in Diagnosis-based Case Grouping

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Step 2. Cost-Accounting AnalysisStep 2. Cost-Accounting Analysis

Used to determine unit cost per case

Allocate the full costs, direct and indirect, from administrative and ancillary departments to clinical departments estimate the full unit cost of a case in that department.

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Step 3. Calculate Case Group WeightsStep 3. Calculate Case Group Weights

Case group weights reflect the average cost per case in a case group (i) relative to the global average cost per case.

For example, a case group weight of 1.2 indicates that these cases use on average 20% more resources to diagnose and treat than the average.

Average cost per caseCGW

Global average cost per casei

i

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Step 4. Calculate the Base RateStep 4. Calculate the Base Rate

The base rate is the global average cost per hospital case--computed from the hospital pool

A major policy lever in a case-based hospital payment system: Influences the allocation of health care resources between the

hospital sector and other parts of the health care system, Influences the allocation of resources across hospitals and

regions Can be a tool to promote equity– e.g. increase resources in

areas that have been historically underfinanced

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Setting the Hospital PoolSetting the Hospital Pool

The hospital pool: The amount of funds available to the purchaser in one year to pay for

hospital services for all providers included in the payment system; Excludes direct out-of-pocket payments; May include funds for capital expenditures or only operational

expenditures. The hospital pool may be set by:

Bottom-up costing: but maintains old cost structure; exact specification of services and calculation of costs is difficult;

Top-down allocation: a fixed % of the health budget is allocated to hospital sector; % is a policy tool; or

Combination: base pool on estimated resource needs and also fix % allocation as a policy tool

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Step 5. Information and Billing Step 5. Information and Billing SystemsSystems

Information and billing systems are required for hospitals to record the information about each case to determine the payment rate, and to document the billing and payment process

The two main components are established at both the provider and the purchaser level: Hospital case database, including basic discharge information

about each hospital case at each hospital included in the payment system; and

Financial database, including cost accounting and expenditure information.

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Step 6. Refine Case GroupingStep 6. Refine Case Grouping

Routine revision and refinement of the case groups and weights to incorporate new data from the case database into the cost per case estimates, case groups, and case group weights.

As more data become available from the information system, case groups can be refined by: Increasing the number of case groups; Increasing the number and range of clinical characteristics used to

group the cases (e.g add comorbidities or severity measures); Developing supplementary payment mechanisms for outlier cases.

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Practical Applications andPractical Applications andExperiencesExperiences

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Health Policy Context for a New Health Policy Context for a New Hospital Payment SystemHospital Payment System

What is the system, organizational, and policy context of health care services?

What are the goals of the payment system? What conditions must be met and what steps are

required to ensure that the goals will be achieved? What changes can be expected in the hospital sector

and other parts of the health care system and community after the case-based payment system is introduced?

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Implementation IssuesImplementation Issues

Transition to a case-based payment system: Transition from budget through other output-oriented

payment system (e.g. per diem) Incremental inclusion of hospitals Incremental inclusion of reimbursed costs (e.g. start

with variable costs) Incremental inclusion of types of cases Incremental movement from hospital-specific to

system-wide base rate

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Implementation Issues, cont.Implementation Issues, cont.

Measures to counteract adverse incentives (increasing admissions, avoiding costly cases, upcoding, etc.):

Reduction or denial of reimbursement for hospital readmissions

Minimum lengths of stay Purchaser monitoring /controlling volume of

admissions Medical audit or other review processes

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Case Study: Case-based Hospital Payment as Case Study: Case-based Hospital Payment as the Trigger for Broad Health Reform in the Trigger for Broad Health Reform in KyrgyzstanKyrgyzstan

The mandatory health insurance fund (MHIF) implemented a new case-based hospital payment system with 13 hospitals in 1997;

The MHIF leveraged its small amount of money (about 10% of total health funding) to drive broader health reform;

The new case-based hospital payment system only reimbursed variable costs directly related to patient care, while the budget still paid for fixed costs;

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Case Study: Case-based Hospital Case Study: Case-based Hospital Payment as the Trigger for Broad Health Payment as the Trigger for Broad Health Reform in KyrgyzstanReform in Kyrgyzstan

Hospitals used the incremental funds to purchase drugs, supplies, food, and to fund performance-based staff bonuses.

Resulted in support for health insurance from the population (copayments for drugs reduced), and providers (salaries supplemented with bonus payments).

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Outcomes of Case-Based Hospital Outcomes of Case-Based Hospital Payment in KyrgyzstanPayment in Kyrgyzstan

Streamlining of the delivery system--hospital capacity reduced by at least 40% by 2004;

Improved allocative efficiency of the health system--share of health care expenditures to PHC more than doubled from 15 to 38% between 2001 and 2007;

Increased technical efficiency of hospitals--share of health expenditures allocated to direct patient care increased from 16to 33% between 2001 and 2007;

Improved service delivery and quality improvement--hospitals not reimbursed by the health insurance system unless accredited.