John C. Langenbrunner and Miriam M. Wiley
Introduction and overview
The rationale for provider payment policies for hospitals is to change behavi-our. If this is managed carefully, performance can improve, leading to both lower costs and higher quality. This, in short, is the premise behind policy changes in hospital payment methods around the world, especially in more mature health care delivery systems.
Payment system changes create new incentives for motivating providers of care and for driving overall organizational changes related to the role of the hospital in the delivery of services. The financing of the hospital sector and the search for more efficient and effective tools and techniques is now a feature of the health systems of most members of the Organisation for Eco-nomic Co-operation and Development (OECD). The recent trends in these countries are just the beginning of a longer-term transition for hospitals and their role in health care delivery.
This chapter examines the evolving changes in hospital payment policies, with particular attention to countries in eastern Europe, defined in this chap-ter as the countries of central and easchap-tern Europe, the countries of the former Soviet Union plus Turkey. The Czech Republic (1995), Hungary (1996), Poland (1996) and Turkey (1961) are also members of the OECD.
These countries face a new and challenging environment. Severe health-sector problems exist related to both total funding for health care and the
efficiency of their health care services. In the late 1980s, it became clear that poor performance and declining health outcomes were caused not only by underfunding, but also by inadequate management of health care resources (Sheiman 1993; Ensor 1997). The lack of efficiency incentives were compounded by low levels of spending. The share of gross domestic product devoted to health was traditionally small, ranging from 3 to 6 per cent (Preker and Feachem 1996) versus 6–9 per cent in OECD countries (Poullier et al. 1994). The chronic underfunding was exacerbated in the transition to a more market-based economy when health funding fell precipitously (Klugman and Schieber 1996;
University of York 1998).
Another area of concern was the bias of hospital care over primary care, compounded by the inefficiency of outpatient physicians. The lack of com-petition and choice as well as the lack of efficiency incentives encouraged physicians to act as indifferent dispatchers in referring patients to hospitals.
Referral rates to hospitals ran as high as 25–30 per cent of first visits to clinics in countries of the former Soviet Union in the early 1990s (Sheiman 1993) relative to 8.6 per cent in the United Kingdom and 5.2 per cent in the United States (Sandier 1989). Hospital admission rates as a percentage of population were 18–24 per cent for countries of the former Soviet Union relative to 16 per cent on average for all OECD countries. About 65–85 per cent of state health budgets was allocated to inpatient care in countries of the former Soviet Union (WHO 2001) compared with 45–50 per cent in OECD countries (OECD 1997).
As in OECD countries, some countries in eastern Europe are examining alternatives to historical budgeting approaches. These approaches generally fall into four categories: (i) payments per day; (ii) payment systems per case or per admission, some with case-mix adjusters; (iii) global budgeting; and (iv) capitation. This chapter examines the adoption and implementation of these approaches in countries of eastern Europe compared with similar systems in western Europe.
The inherited system
Provider payment systems for health services in hospital cannot be separated from larger health care system issues. The health sectors of most countries in eastern Europe are in transition from a centrally planned national health service model to more decentralized systems. (Chapter 2 describes the main features of the Soviet health care model.)
The public system was financed from the general state budget, from enterprise budgets and extra-budgetary funds. Private payments were limited to a few non-essential services as well as some unofficial payments to public providers for preferential treatment.
Funding flowed through a centralized, top-down bureaucratic allocation pro-cess, based on national budgets formulated and passed by the central legislative and policy-making bodies. Resources were allocated according to a consolid-ated national plan. Reserves were allocconsolid-ated according to norms based on the Semashko model: an expert assessment of the number of units of input required
for a given population at each level of the system. The norms led to specific budgetary requirements for each health care institution.
Line-item budgets
For a hospital, the number of beds determined the number and type of staff.
The total staffing budget was obtained by multiplying staff numbers by the appropriate national pay scale. This reflected the experience of staff, their specialties and some adjustment coefficients. One of the adjustments was for geographical region of working; areas of environmental degradation, such as the area round the Aral Sea or sites of nuclear tests, were considered to justify additional salary. Funding for other line items was based on the facility and population-specific norms. Food expenditure in hospitals (budget line item 9), for example, was based on the number of bed-days in the previous year (Ensor and Langenbrunner 2001) or on the normative number of bed-days. Alto-gether, there were 18 distinct categories. In an example from the Ukraine, salaries plus payroll tax were the largest category. A capital allocation could be included (budget line item 16) but was perceived as a one-shot allocation and not reflected as annual depreciation. The ‘planned’ levels at the beginning of the year differed from the ‘actual’ levels, depending on factors such as inflation and revenues during the budget cycle.
Line-item budgeting was characterized by ‘rules of conduct’ (Preker and Feachem 1996) as follows.
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The current year’s allocation primarily reflected historical budgets plus some inflation factors.•
There was limited or no reallocation across categories or from year to year.•
Salaries, food and medicines took priority under difficult economic constraints.Line-item budgeting has both positive and negative features. On the posit-ive side, it allows strong central control when management skills in local regions are inadequate, provides predictable levels of budgets and expenses and can mean that minimum standards are met in every facility. On the negative side, however, it means:
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incentives to underprovide or refer out for needed care;•
little flexibility to adapt to local or innovative circumstances;•
no direct incentives for information or management expertise;•
no direct incentives for outputs or outcomes; and•
a tendency to create high levels of fixed resources, as line-item allocations rarely change.Line-item budgets, especially when tied to resource inputs, have tended to discourage the reduction of excess capacity (building space and personnel), a hallmark of most countries in eastern Europe (Preker and Feachem 1996;
Klugman and Schieber 1997; University of York 1998). Second, constrained line-item budgets have encouraged facility managers (and individual providers) to find other sources of funds. This partly explains the widespread use of informal out-of-pocket payments in eastern Europe (Lewis 2002).
The transition
As early as 1987, the Soviet Union began testing new organizational and financing models to improve efficiency. The New Economic Mechanism, for example, picked a number of geographical demonstration areas, reorganized the polyclinics into family practice groups and initiated fundholding arrange-ments. The objective was to shift the locus of care to less expensive outpati-ent and primary services. Sheiman (1993) reports that these arrangemoutpati-ents in the Russian Federation reduced inpatient admissions by 10–15 per cent and reallocated from approximately 70 : 30 inpatient-to-outpatient spending to levels closer to 50 : 50 (Schieber 1993). Samara, an oblast (region) in the Russian Federation, reported closing 5500 beds. In the Dzhezkazgan region of Kazakhstan, admissions declined by 26 per cent and numbers of beds per capita by 32 per cent (Langenbrunner et al. 1994). These demonstration projects did little to upgrade the technology of inpatient payment systems. Fundholders in Dzhezkazgan used only a simple payment system per day with administrat-ive guidelines for admissions and discharges. Average lengths of stay did not drop and case mix did not appear to change over time. The New Economic Mechanism demonstrations ultimately failed when the St Petersburg experi-ment, which involved a system of budget-holding by primary care organiza-tions, was stopped because of inappropriate declines in referrals to hospitals and underdeveloped quality assurance systems.
Since the early 1990s, the search for a more diverse revenue base in the countries of the former Soviet Union has included: (i) new revenues through small patient co-payments, especially for outpatient pharmaceuticals; (ii) separ-ate employer-based payroll contributions that de-linked revenues from the budgetary process; (iii) private contracting with enterprises; and (iv) a private supplemental insurance sector. These measures have typically been linked with organizational changes such as the enactment of separate, self-sustaining public health insurance trust funds. These funding and organizational changes have catalysed changes in purchasing arrangements, policy on provider payment and organization. Several areas of change typically have emerged, including restructuring of financing, decentralization and local management autonomy and new purchasing arrangements.
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Restructuring of financing. Separate dedicated payroll taxes either replace or supplement traditional public budgets for health. Poland is implementing health insurance but uses traditional public health budgets to cover high-end specialized services such as transplants. Some countries of the former Soviet Union use public budgets to cover insurance fund contributions for the non-working population and continue to fund ‘specialized’ services such as tuberculosis, psychiatry and oncology, as well as ‘priority’ services such as immunization and AIDS services. Private sources of payment by employers, insurers and individuals also contribute to overall expenditure on care.•
Decentralization and local management autonomy. The devolution of decision-making from central committees towards regional and local autonomy varies considerably between countries. In the Russian Federation, relatively autonomous regional insurance funds collect and spend about 85 per centof all health expenditure; in other countries, funds are collected centrally and reallocated to regions and local areas. In most of eastern Europe, coun-tries pool and reallocate some funds to improve equity. The 19 regional funds in Poland send 14.2 per cent of revenues to the central fund for reallocation. Decentralization can extend to the provider level, with legal and organizational autonomy for physicians (for example, Croatia, Hungary and Poland) and for inpatient facilities (for example, Kazakhstan and Poland). Most countries in eastern Europe, however, still lack an adequate management and information infrastructure to manage change and risk.
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New purchasing arrangements. Purchasers and providers of care are being split. Funds now purchase services through selective contracting (Savas et al.1997) and encourage improved internal efficiency through improved service payment systems. New performance-based or market-oriented hospital pay-ment systems pay for a defined unit of hospital output.
Alternative models of hospital payment
A specification of appropriate units of measurement is an essential precondition for quantifying the relationship between resources and hospital workload.
Resource measurement is reasonably straightforward, being specified mostly in monetary terms. Staff resources may be estimated in terms of full-time equivalents or hours worked, or space may be measured in square metres.
The quantification of hospital workload is more challenging, however, since alternative units of measurement may include procedure or service, hospital bed-day, hospital discharge, case mix-adjusted discharge units or an aggregate of these units. The option chosen to measure hospital workload is an import-ant constituent of any hospital payment model. These are reviewed briefly here to illustrate the implications associated with a range of alternative hos-pital payment models.
Payment based on procedure or service
Financing tied to the provision of a specified procedure or service is often referred to as fee for service. The number of procedures or services provided within the specifications agreed between the payer and the service providers determines the level of resources available to the hospital. Factors relevant to the implementation of this approach include:
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This is administratively straightforward for the payer and provider.•
Demands on specificity and timeliness of data may be considerable.•
Specification or quantification of surgical procedures and paraclinical services are more straightforward, which may improve patient access.•
An incentive to perform more procedures may have an adverse effect on quality and overall expenditure.•
There is an incentive to improve efficiency when hospital costs exceed the reimbursement rate but no incentive when the rate exceeds costs.Payment per day
Financing based on a specified payment per bed-day raises the following issues:
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The data needed are generally available.•
This is administratively straightforward for the payer and provider.•
Incentives exist to maintain long lengths of stay, which may have an adverse effect on access, quality and expenditures.•
The skewed distribution of costs during a hospital stay is not related to the cost of care; costs per day typically follow a bell-shaped curve, increasing on successive days after admission and then decreasing.Payment per case
There are two basic types of models: per case or per discharge. In the first, a simple discharge-based payment model, hospital financing is based on a speci-fied payment per discharge, regardless of the type of case. Issues arising in the implementation of this model include:
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The data are generally available.•
There is an incentive to increase admissions, especially if payment exceeds costs, which may have an adverse effect on quality.•
The resources allocated may have little relationship to the cost of the care provided.In the second type, the case mix-adjusted discharge model, financing is based on a specified payment per discharge unit standardized for variations in types of cases or case mix. The most widely used approach internationally is the diagnosis-related group (DRG) system. Using this system, together with estimates of resource use at the patient group level, a case mix index measur-ing the relative cost of the case mix treated by the hospital can be estimated.
The issues arising with the application of this model include:
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This model is somewhat complex administratively and operationally.•
It depends on the availability of relatively consistent and comprehensive activity and cost data.•
It is more equitable, as reimbursement is based on a composite measure of services provided.•
Incentives exist to ensure that costs are limited by service type within payment boundaries.Global budget
Global budgets for hospitals are aggregate one-line payments fixed in advance to cover expenditures for specified services during a fixed period of time (for example, 1 year). Global budgets constrain the growth in the price and quantity
of services while allowing flexibility in the use of resources within budget limits.
A budget surplus at the end of the payment period can be kept by the facility for use as it sees fit; spending above the target must be met by the hospital from other sources. Once a budget is established, providers must remain within the budget either by adjusting the price or cost of services or the volume of services. Efficiency improves when global budgets are strictly enforced. The issues arising with the application of this model include:
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The model depends on the availability of more comprehensive activity and cost data.•
Payer complexity generally increases with the complexity of the budget formula and whether it includes only historical budgets (the simplest) or utilization, adjustment for case mix or adjustment for other risks and social equity factors.•
It is somewhat complex administratively and operationally for the provider, so that local management autonomy is critical to reallocate resources effici-ently and maintain spending within a fixed budget.•
Incentives ensure a cost profile by service type within payment boundaries, but if revenues are too low, global budgets may contain incentives to lower the quality of care or to ration services.•
Periodic monitoring by the payer may be necessary, as well as an adminis-trative system to enforce the budget and to respond to appeals and special requests.Capitation
At its simplest, per capita payment is used to provide (i) a specified package of health care services for (ii) a specified population for (iii) a fixed fee per person for (iv) a fixed period of time (for example, 1 year). Per capita payments can be used at a variety of levels in the health sector: to determine regional budgets, to determine budgets for intermediary fundholders within a region or to distribute funds from the payer to a specific health institution or group of institutions.
At the facility level, the capitation amount depends on the types of services included in the benefit package, and the membership group of enrollees must be clearly specified. A fundholder and health institution may choose to pro-vide only some services under a capitation payment (for example, hospital services at a single facility) or all services for an integrated system of facilities (for example, a hospital and its associated polyclinic). The issues arising with the application of this model include:
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Of all the payment systems, this is the one that most depends on the availability of comprehensive data on activities and costs, especially for the provider.•
Payer complexity generally increases with the complexity of the budget formula and whether it includes only historical per capita payments (the simplest) or utilization, adjustment for case mix or adjustment for other risks and social equity factors.Table 8.1 Rating of selected models of hospital payment against objective criteria
Unit of payment Efficiency Access Quality
Procedure or service uncertain surgery positive uncertain
Bed-day negative uncertain uncertain
Discharge negative positive negative
Case mix-adjusted unit positive positive uncertain
Global budget positive uncertain uncertain
Capitation positive uncertain uncertain
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It is the most complex and risky model for the provider operationally and administratively. The provider manages the entire episode of care, and local management autonomy is critical to reallocating resources efficiently and maintaining spending within a fixed budget.•
Strong incentives exist to ensure a cost profile by service type within the boundaries of revenue limits, but if payment is too low, capitation may contain incentives to lower the quality of care or to ration services.The models reviewed here can be evaluated against the objectives of effici-ency, access and quality care (Table 8.1). None of these models contribute to achieving all the objectives of efficiency, access and quality within a hospital payment system. However, complementary administrative safeguards have been effective in limiting concerns related to access, quality and volume (Coulam and Gaumer 1991).
Early experiences: central and eastern Europe and the former Soviet Union
The most popular approaches in the early years of transition were based on payment per day and per case, which can be viewed as linked. These systems were implemented in some countries in four or five successive stages: