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

1. Case-Based Hospital Payment Systems:Key Aspects of Design and Implementation Cheryl Cashin - USAID ZdravPlus Project/Abt Associates

2. Why are Hospital Payment Systems 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

3. Technical Concepts

4. Definition 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.

5. Incentives Economic signals that direct individuals and organizations toward self-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.

6. What are the Incentives of Case-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, purchaser, and the system

7. Potential Goals of a Case-Based HospitalPayment System • 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) • 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

8. 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.

9. Methodological Issues

10. Components of a Per Capita Payment System • 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.

11. Payment Formula Where, 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

12. Step 1: Define Case Groups

13. Diagnosis-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)

14. Steps in Diagnosis-based Case Grouping Step 1. Determine the structure of case grouping Step 1.1 Create major diagnostic categories Step 1.2 Group cases into medical/surgical cases Step 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 case Step 2.2 Aggregate cases by ICD-10 code Step 2.3 Remove outliers Step 3. Merge clinical and economic criteria to determine case groups Step 3.1 Create diagnosis-based case groups Step 3.2 Calculate average cost per case in each case group

15. Step 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.

16. Step 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.

17. Step 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

18. Setting 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

19. Step 5. Information and Billing Systems • 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.

20. Step 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.

21. Practical Applications and Experiences

22. Health Policy Context for a New Hospital 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?

23. Implementation 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

24. 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

25. Case Study: Case-based Hospital Payment as the Trigger for Broad Health Reform in Kyrgyzstan • 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;

26. Case Study: Case-based Hospital Payment as the Trigger for Broad Health Reform 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).

27. Outcomes of Case-Based Hospital Payment 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.