Presented at the Health Services Research Centre, Faculty of Health,

1. FUNDING POPULATIONS AND PAYING PROVIDERS: THE ROLE OF FINANCIAL RISK IN THE NEW ZEALAND PRIMARY HEALTH CARE STRATEGY Presented at the Health Services Research Centre, Faculty of Health, Victoria University of Wellington, October 18 2017 Bronwyn Howell, School of Management, Victoria University of Wellington bronwyn.howell@vuw.ac.nz

2. OVERVIEW • Background and motivation • Risk and risk management as an inquiry lens • The simplified system model • Application to the NZPHCS • with focus today on change from fee-for-service to capitation payment of government funds • Future policy options

3. PERSONAL MOTIVATION • PhD thesis Victoria University School of Government, 2016 • building on work undertaken at the New Zealand Institute for the Study of Competition and Regulation, 2005-2009 • Supervisors: • Professor Jackie Cumming • Professor Claudia Scott • http://researcharchive.vuw.ac.nz/bitstream/handle/10063/6131/thesis.pdf?sequence=1

4. POLICY BACKGROUND • Alma-Ata Declaration • population focus • NZPHCS (2001) • Policy objectives: • lower private payments • reduced inequalities • focus on population health • Instruments: • increased government funding (fiscal instrument) • Primary Health Organisations (PHOs) (structural instrument) • capitation subsidies replace fee-for-service (contractual instrument)

5. FINANCIAL RISK AS AN INQUIRY LENS • Financial risk and its management fundamental to health care • Two-sided nature of health care (Arrow, 1963) • risk management/insurance • care delivery • ‘Insurance’/risk management arrangements can be social or private • both enable subsidies for care delivery • Subsidies lead to unnecessary utilisation • reduced/managed via risk-sharing • demand-side – deductibles and co-payments • supply-side – utilisation review; price and volume; capitation etc.

6. THE MEDICAL CARE TRIAD

7. RISK • “The effect of uncertainty on objectives” (ISO 31000) • Risk management = the management of the effects of uncertainty on a given stakeholder’s objectives • Insurance pooling (for managing some random risks) • manages an individual’s uncertainty about ability to fund care when future uncertain needs for health care crystallise into a certain need • Contractual risk management (for controllable risks) • incentives impose costs of risk-causing actions on those that control their instance • increases the likelihood of the potentially-harmed party meeting their objectives

8. AUGMENTED MEDICAL CARE TRIAD

9. RISK AS A STOCK AND FLOW IN PRIMARY HEALTH CARE SYSTEMS • Complementary to funding flows • Transaction focus • Analysis enabled • at and between all levels of interaction (macro, meso, micro) • across boundaries of risk management and care delivery ‘sides’ • Noting: • Many different risks arising from many different origins • future uncertainty • contractual incompleteness • third-party funder, co-worker unobservability • limited teamwork in care delivery • co-ordination of multiple instances of care delivery • interact with each other

10. A SIMPLIFIED PRIMARY HEALTH CARE SYSTEM

11. FEE FOR SERVICE PROVIDER PAYMENTS • Care delivery (consultations) drive practice costs (practitioner time) • Average cost per consultation (standardised unit of care delivery) c • Break-even if fee charged per consultation (unit of care) f = c • Regardless of the number of consultations (units of care) q supplied • But • few incentives to constrain consultation costs (c increases above optimal) • ‘over-servicing’ (q higher than optimal Q) if insurer/funder pays the fee for service • financial risk from variations in q and c borne by funder

12. DEMAND-SIDE RISK-SHARING • Deductible • service users pay a fixed fee (to insurer/funder) each time a consultation is sought; insurer/funder pays fee • Co payment • service users pay a share (e.g. 20%) of the total cost of care supplied; insurer/funder pays the rest • Balance-billing • insurer/funder pays a fixed fee per consultation; service user pays the balance • Ambiguous evidence that any are effective at constraining the number of consultations or cost of care delivered • But any service user charge limits the use of care by income-constrained individuals

13. SUPPLY-SIDE RISK-SHARING • Use financial incentives to alter providers’ excessive cost-causing behaviour • Price and volume contracts • fixed fee for a fixed number of consultations; separate negotiation for quantity above this number • providers bear risks of service users needing more intensive care than average • Utilisation review • review outputs and pay only for those meeting predetermined cost and quality criteria • providers bear risks of delivering nonstandard care • Work well for specialist and hospital care, but not primary • 3. Capitation

14. BLENDED CAPITATION AND FEE-FOR-SERVICE

15. PURE CAPITATION • The care provider becomes the insurer • All variations in • consultation numbers, care intensity (q) required • costs of care delivery (c) (e.g. premises rental, staff wage rates) • borne by providers • Capitation payments (K) are insurance premiums • Require sophisticated risk-rating • age, gender, income (deprivation), ethnicity, past use …. • The best risk-rating formulae account for less than 30% of the difference between expected and observed utilisation • age and gender are the worst predictors (less than 2%) • past use is the best • Risk pools must be very large if pure capitation is to be used

16. PARTIAL CAPITATION CONTRACTING • Fee-for-service, pure capitation two extremes • Fixed fee (K1) and variable component per consultation (v) • random and controllable risks bundled • higher fixed component => more risk shared with recipient • fee-for-service => no risk-sharing • pure capitation => recipient bears all risks • Any variation from expected utilisation leads to profits or losses • incentives to constrain costs to minimise losses • but how much of variation can be anticipated? • independent demand => average out over time • correlated demands => serial profitability, losses

17. USE MODEL AND ASSOCIATED MAPPNG FRAMEWORK TO ANSWER RESEARCH QUESTIONS • How have the changes to government funding introduced by the NZPHCS altered the magnitude and management of financial risk in the New Zealand primary health care sector? • How have these changes in financial risk affected the likelihood of achieving the government’s cost growth containment, equity and care delivery policy objectives? • What policy changes (if any) would increase the likelihood of achieving the desired policy objectives?

18. PRE-NZPHCS ARRANGEMENTS

19. NZPHCS ARRANGEMENTS: FIRST CONTACT

20. NZPHCS RESULTS • Government fiscal risks constrained • but risk pooling responsibility fragmented, passed to risk-averse providers (RQ1) • Government funding for population-based health care conflated with funding to reduce fees paid by targeted service users • Children under 6, 13 years; VLC providers • Higher levels of financial risk passed to providers with higher proportions of targeted service users • no evidence that these providers are better able to manage risks • Higher private cost and care quality variability; more inequitable distribution of financial risk burden (RQ2) • financial risk-sharing with providers likely ineffective as providers set service user fee and select service quality/effort levels

21. RISK PREMIUM EXAMPLE

22. FINANCIAL RISK DIFFERENCES: VLC & STANDARD

23. ARE EXPECTED CONSULTATION NUMBERS GOOD ESTIMATES?

24. INEQUITIES BETWEEN PROVIDER TYPES: EXPECTED AND OBSERVED UTILISATION

26. ALTERNATIVE POLICIES (RQ3) • ‘Zero fees’ • removes service user fees but exacerbates high costs, inequities • Complex contracting, improved capitation formulae • small reduction in financial risk costs, but negligible effect on relative inequities as risk pools remain over-small • “Mixed Funding” model • pragmatic solution in current context • partially addresses risk pool size; equalises risk shared with providers • platform for future changes (e.g. full funding, Managed Care) • but government share of financial risk, costs increases

27. MIXED FUNDING MODEL • Shares random utilisation variation risk between government, providers and service users • but decision needed on fee relief pool management (DHB or other?) • Separates health needs-based funding from funding to reduce fees paid • equalises financial risks shared with providers • Focus on individual not provider • necessitates reintroduction of individual financial need indicator • Provides platform to progress over time to • fully-government-funded system • managed care-style institutions

29. MIXED FUNDING MODEL

31. FUTURE WORK • NZPHCS context • qualitative empirical analysis of the extent to which financial risk and other proposed factors can account for observed changes (or lack of them) in the NZ primary health care sector • quantitative assessment of the magnitude of financial risk borne by a sample of individual providers under the current funding arrangements (subject to data availability) • assessment of the extent to which financial risk-sharing influences practitioners’ employment choices (provider ownership vs employee status) and effort levels (subject to data availability)

32. THANK YOU • Questions?