3. Learning Objectives
After completing this lecture, you will be able to:
Identify the definition of provider payment system and the
characteristics of the major types of payment systems.
Identify the tactics payors and providers use to reduce their financial
risk.
Determine the cost per member per month for specific procedures.
Understand the new wave of innovations in health care payment
systems.
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4. Why ?
The evolution of the payment system will be emphasized in light of the ongoing public policy
debate about the roles, responsibilities, and effects of the payment system on various
stakeholders, including:
● Patients.
● Providers, including physicians, institutional providers, and ancillary providers (e.g. physical
therapists, laboratories, hospices, and home care providers).
● Employers.
● Payors, including various levels of government agencies and managed care organizations.
● Regulators, including governmental and private agencies (e.g. the Joint Commission on
Accreditation of Healthcare Organizations and the National Committee for Quality
Assurance).
Provider payment systems can be powerful tools to promote themahmoud shaqria 4
5. Objectives should be achieved by
Provider Payment systems
*Payment systems should help achieve health policy
objectives by encouraging access to necessary health
services for patients, high quality of care, and improved
equity, while promoting the effective and efficient use of
resources
and, where appropriate, cost containment
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6. A provider payment system definition
*may be defined widely as the payment method combined with all
supporting systems, such as contracting, accountability mechanisms
that accompany the payment method, and management information
systems.
*In the context of health systems, therefore, provider payment
systems accomplish far more than simply the transfer of funds to
cover the costs of services.
*A provider payment method may be defined more narrowly as the
mechanism used to transfer funds from the purchaser of health care
services to the providers.
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7. Approaches to Provider Payment
systems
Payments to health care providers can be approached in three ways:
• Direct payment to the provider by the patient
• Direct payment to the provider by the patient, but with later full or partial
reimbursement
• Direct payment to the provider through intermediate provider payment
arrangements, with only a limited copayment or informal charge paid by the
patient.
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8. PHC Payment Methods
There are three main types of PHC (including outpatient) payment methods:
line-item budget; fee-for-service (with or without a fixed-fee schedule); and per capita
(table 1).
It is also possible to pay PHC providers per case or treatment episode, but such
payment methods are rarely used for PHC services because they do not correspond to
the fundamental PHC set of services, which should be oriented toward health promotion,
disease prevention, and case management.
Also, per case payment methods are too complicated to design for PHC and outpatient
care, and would place an excessive administrative burden on the purchaser, as most
chronic conditions do not have a discrete endpoint, and a separate payment system
would have to be developed for preventive services.
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10. Line-item budget
A line-item budget provider payment method is the allocation of a fixed amount of funds
to a health care provider to cover specific line items (or input costs), such as personnel,
utilities, medicines, and supplies, for a certain period.
Line-item budgeting is therefore input-based with payment to providers both set and
made prospectively. It offers strong administrative controls, which are often valued in
government-run systems.
In theory, technical and allocative efficiency of health interventions can be optimized by
manipulating the government budget lines over time to increase delivery of cost-effective
health
interventions and decrease delivery of less cost-effective interventions.
This assumes that governments can track and understand the right combination to
achieve these results. But in reality, they often cannot for lack of good monitoring
information.
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11. Fee-for-service
In fee-for-service methods, the provider is reimbursed for each individual
service
provided. They may be either input-based or output-based.
They are input-based if there is no fixed-fee schedule and if services are not
bundled (that is, where health care services are not grouped into a higher
aggregated unit). In this case, providers are permitted to bill purchasers for all
costs incurred to provide each service. This is often called “retrospective cost-
based” payment, a term commonly applied in the United States, among other
countries.
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12. Fee-for-service
The method can also be output-based if there is a fixed-fee schedule (as in
Canada, Germany, and Japan) and services are bundled to some degree: the
provider is paid the fixed fee for the predefined service regardless of the costs
incurred. In this type of fee-for-service arrangement, the provider has an
incentive to increase the number of services overall during the encounter and
to reduce the inputs used per service.
Services that can be provided most efficiently and generate a surplus will be
expanded most quickly. Fees can be set so that the prices paid to the
providers are congruent with the costs of producing those services, such that
surpluses are not excessive.
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13. Per capita
In per capita (or capitation) payment systems , the provider is paid, in advance, a
predetermined fixed rate to provide a defined set of services for each individual enrolled
with the provider for a
fixed period.
Per capita payment systems are output-based, and the unit of output is the coverage of
all predefined services for an individual for a fixed period, usually one month or one year.
The key principle is that the payment to a provider is not linked to the inputs that the
provider uses or the volume of services provided. Therefore, some risk is shifted from the
purchaser to the provider.
If the provider incurs costs that are greater than the per capita budget, the provider is
liable for them. The corollary is that if the provider achieves efficiency gains and incurs
costs that are lower than the per capita budget, it can usually retain and reinvest this
surplus.
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14. Hospital Payment Methods
There are five main types of hospital payment methods. Two
discussed above— line-item budget and fee-for-service—can
be applied to inpatient services.
The three other methods are per diem, case-based, and
global budget.
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15. Per diem
In a per diem (per bed-day) approach, the dominant incentive is to raise the number of
hospital days, in the process increasing bed occupancy. It has secondary effects of,
possibly, increasing bed capacity and shifting outpatient and community-based
rehabilitation services to the hospital setting.
At the same time, providers have an incentive to reduce the intensity of their services for
each bed-day. High occupancy rates are achieved through boosting hospital admissions
and average length of stay. The incentive to lengthen this period is likely to be stronger
than the incentive to raise admissions, because there is also an incentive to reduce
inputs per day, and hospital days tend to be more expensive early in a stay than later.
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16. Per diem
The average per diem rate is usually easy and quick both to calculate
and implement because it is typically based at first on the total historical
annual hospital costs divided by the total number of bed-days.
The rate may be adjusted to reflect characteristics of patients, clinical
specialty, and variations in case mix across hospitals . It may also vary
for different days in the hospital stay, with early days paid at a higher
rate than later days.
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17. Case-based
Case-based hospital payment systems simultaneously create the
incentives to increase the number of cases and to minimize the inputs
used for each case.
Because providers have more control over resource use per case than
over the total number of treated cases, the latter incentive is typically
stronger (in terms of availability of provider manipulation), and therefore
case-based hospital payment systems have been used as a mechanism
to control costs and reduce capacity in the hospital sector. They are
found in Brazil, the Kyrgyz Republic, and Thailand (and in some
countries in Europe such as Hungary and Slovenia.
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18. Case-based
A case-based system can, though, increase both admissions and unnecessary
readmissions. In Hungary, Russia, and many other countries, admissions rose
significantly after such a system was introduced.
In a case-based system all cases fall into some predefined number of payment
categories. Categories are typically defined by levels of average resource use. All cases
that fall into an individual category are reimbursed at the same rate. As a result, it is
beneficial for hospitals to attempt to admit more inexpensive cases within a payment
category, to avoid more costly cases, and to split expensive cases into multiple stays (the
last two approaches sometimes creating access barriers for severely ill patients). To
counteract these adverse incentives, sophisticated methods for differentiating between
cases of different resource intensities, such as DRGs, have been developed and are
continually being refined.
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19. Global budget
A global budget at the hospital level is set in advance to cover the aggregate
expenditures of a hospital over a given period (usually one year) to provide a set of
services that have been broadly agreed on by the hospital and the purchaser. It is an
overall spending target or limit that constrains the price and sets the quality of the
services to be provided.
While the concept is simple, the types of global budget vary with budget flexibility, types
and number of providers, number of purchasers, budget cap target, and budget basis.
According to the degree of flexibility, global budgets can be divided into two types—soft
and hard. In the former, the purchaser assumes the costs of overruns; in the latter, the
provider assumes the financial risk. Global budgets can also be grouped by hospital
services, physician services, pharmaceuticals, and both services and drugs. They can,
as well, be classified by having single or multiple purchasers.
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20. MAIN CHARACTERISTICS OF PROVIDER
PAYMENT METHODS
The above discussion noted that provider payment methods may be
categorized by three characteristics:
• Whether the price or budget that is paid to providers is set prospectively (in
advance) or retrospectively (after services are provided)
• Whether the payment to providers is made prospectively or retrospectively
• Whether the payment to providers is related to inputs used (such as salaries
or pharmaceutical costs) or outputs produced (services).
The relationship between the three characteristics is shown in figure 1. It is the
combination of the three characteristics that shapes the incentives likely to be
created by a provider payment method.
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