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Chapter
Provider Payment Mechanisms:
Effective Policy Tools for
Achieving Universal and
Sustainable Healthcare Coverage
AbualbishrAlshreef
Abstract
Globally, governments are seeking to develop equitable and sustainable health-
care systems for delivering universal healthcare coverage under budget constraints.
This chapter provides an analysis of fee-for-service, a commonly used payment
mechanism for reimbursement of healthcare providers, and proposes appropriate
reform in order to promote cost containment in the context of low- and middle-
income countries (LMICs). The analysis used secondary data derived from the
literature. The analysis revealed that capitation, case-based, and global budget
provider payment mechanisms have the potential to control healthcare costs by cre-
ating incentives for providers to reduce the volume of services. Capitation payment
has the potential to promote provider efficiency, while global budget may reward
inefficient hospitals if risk adjustors (such as gender and age) are not considered in
the resource allocation formula. Both capitation payment and global budget have
lower administrative costs compared to fee-for-service. Development of support-
ing measures is crucial including legal, financial, referral, quality assurance, and
management information systems.
Keywords: health reforms, funding, health insurance, provider payment,
expenditure and costs, cost containment, LMICs
. Introduction
Healthcare provider payment mechanisms can be used as powerful tools for
promoting the development of health systems towards the achievement of health
policy objectives by encouraging the effective and efficient use of scarce resources
[1]. This chapter provides an in-depth review addressing the problem of the
escalating costs of health services for low- and middle-income countries (LMIC)
and explores alternative provider payment mechanisms for promoting cost con-
tainment and contributes to universal and sustainable healthcare coverage. This
introduction section provides background information with more focus on the
widely used fee-for-service (FFS) provider payment mechanism and its impact on
healthcare costs.
During the past four decades, the escalation of healthcare costs for LMICs has
been an issue of concern at both operational and policy levels. Many policy tools
Universal Health Coverage
have been implemented to control the escalation in cost and/or to absorb its nega-
tive effect in many countries. This included revenue generation through the expan-
sion of health insurance population coverage, strengthening contracting capacity,
and reimbursement of pharmaceuticals based on essential medicines lists (EMLs).
However, the cost of health services has remained a big challenge for healthcare
systems in many LMICs.
As an alternative strategic approach, provider payment mechanisms can create
incentives for wise and efficient use of resources and create a behavioural environ-
ment for healthcare providers to supply cost-effective health services [1–3]. By
exploring alternative provider payment mechanisms and assessing their effect in
controlling healthcare costs, potentially feasible measures based on good quality
evidence may be proposed. Providing evidence for provider payment reform is
strategically important to contribute to the decision-making process to tackle the
increasing costs of health services for LMICs. This will contribute to the ongoing
reforms towards universal healthcare coverage in many countries.
This chapter analyses the existing provider payment mechanism (widely used
in LMIC context) and proposes payment system reform in order to promote cost
containment. A conceptual framework was used to analyse the existing provider
payment mechanism, explore alternative mechanisms and assess their potential
in promoting cost containment in LMICs. The chapter identifies lessons learned
from international experiences on cost containment for health insurance schemes
(and similar funding structures) and assesses the most appropriate options. The
feasibility of implementing the proposed cost containment measures in the context
of LMICs is discussed.
This chapter is structured into five sections starting with this introductory sec-
tion. Then, Section 2 describes the methodology and conceptual framework used
for the analysis. Section 3 analyses the problem of the escalating costs of health
services in LMIC context and uses the conceptual framework for the analysis of the
existing FFS payment. Section 4 then analyses the alternative provider payment
mechanisms for controlling healthcare cost using the same conceptual framework.
Finally, Section 5 is a concluding section, summarises the key messages, suggests
potential measures emerged from the analysis and assesses the feasibility of imple-
menting the proposed reform in LMICs.
This chapter of the book is primarily intended for use by policymakers to
contribute as evidence in the decision-making process for strategic purchasing
of health services in LMIC context. The evidence provided would also be useful
for researchers interested in healthcare financing and for other health insurance
organisations in LMICs. Furthermore, international development partners inter-
ested in health insurance in LMICs may also be interested in this review, including
World Bank (WB), International Labour Organisation (ILO) and World Health
Organisation (WHO).
. Conceptual framework, data and limitations of the review
Having addressed the background information and the aim of the review in
the previous section, this section describes the conceptual framework used for the
analysis, sources of data and the limitations of the review. This chapter of the book
provides an in-depth review exploring alternative healthcare provider-payment
mechanisms particularly capitation, case-based and global budget as potential
policy tools for use in the LMICs. The review is based on secondary data from the
literature combined with the author’s 8years of experience in LMIC context.
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
. The conceptual framework
The conceptual framework used was adapted from the literature, bearing in
mind a basic question: “how provider payment mechanisms work to control healthcare
costs?”. The framework is schematically represented in Figure . It was developed to
articulate the analysis of provider payment mechanisms presented in this chapter.
.. Description of the conceptual framework
The conceptual framework illustrated in Figure is composed of three columns,
which are clearly distinguished by different colours and these columns are inter-
linked by arrows to demonstrate conceptual relationships. The yellow column on
the left side represents four provider payment mechanisms: the FFS currently used
in many LMICs and the three alternative payment mechanisms explored in this
review (capitation, case-based and global budget). The yellow arrows are pointing
to the key output aspects outlined in the middle purple column.
The middle purple column illustrates the processes that affect each payment mecha-
nism and, therefore, impact on the cost of health services [4]. Provider payment mecha-
nisms work by creating incentives that affect the volume of supplied services, use of
input resources, pharmaceuticals, admission rate, average length of stay and prevention
of diseases [1, 4]. Administrative cost varies between the different payment mechanisms
and may contribute significantly to the cost of health services for the insurer or health-
care commissioners [5]. These incentives and administrative costs affect the overall cost
of health services and the cost varies depending on the payment mechanism.
The thick purple arrow emendating from the middle outputs column is pointing
to the intended outcome (reduction of the overall health services cost). The small
box that appears in the lower part illustrates efficiency as a criterion used for the
analysis of provider payment mechanisms. The use of incentives, cost and effi-
ciency in this study is explicitly defined in the following three subsections.
Figure 1.
Conceptual framework for the analysis of provider payment mechanisms.
Universal Health Coverage
... Incentives
Incentives are defined in microeconomics as economic signals that can direct
healthcare providers towards self-interested behaviours [1]. These behaviours can
lead to beneficial or un-intended effects [6]. For example, one payment mecha-
nism can encourage irrational use of pharmaceuticals as an unintended effect,
while another mechanism can promote a reduction in the average length of stay in
hospitals as a beneficial effect.
... Costs
Costs refer to direct cost related to health services covered and reimbursed by
health insurance schemes (or other payers) and have two components: (a) direct
medical cost such as pharmaceuticals, consultations and laboratory tests and (b)
direct non-medical cost such as administrative costs for processing provider claims
for reimbursement [7]. These represent the cost from the healthcare system per-
spective, which this review aims to reduce.
... Efficiency
Efficiency criterion is used to show the relationship between provider payment
mechanisms and their incentives to promote effective and efficient use of resources
to produce maximum outputs in health care [1, 4, 8]. By promoting efficiency at
the supply side through different payment mechanisms, the overall cost of health
services for healthcare systems may be reduced.
.. Justification and use of the conceptual framework
This conceptual framework represents the key aspects to be analysed in this
review, thus keeping the analysis focused. It also helps to articulate the relationships
between provider payment mechanisms and their relative incentives and adminis-
trative cost, which impacts on the cost of health services.
The framework will be used in Section 3 to discuss the role of the existing FFS
payment mechanism in increasing the cost of health services for LMICs. While in
Section 4, the framework will be used to guide the critical analysis of the alterna-
tive provider payment mechanisms (capitation, case-based and global budget) and
assess their potential in reducing the cost of health services.
. Criteria for assessing the feasibility of proposed measures
This has been adapted from [9, 10], and it includes (i) technical feasibility: this
will be used in Section 4 to assess the potential of alternative payment mechanisms
to control cost and (ii) organisational, financial and cultural feasibility: this will be
used in Section 5 to assess the feasibility of implementing the proposed measures in
LMIC context.
. Data sources and selection of papers for the review
.. Data sources
A number of sources of information were used to collect secondary data for this
review. These sources are grouped into four categories:
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
• Electronic databases: web of science, global health and science direct electronic
databases.
• Internet search engines: University of Leeds’s Library electronic catalogue and
Google Scholar were the search engines used to find the full text of selected articles.
• International Organisations’ websites: World Bank, WHO and ILO.Research
articles and working papers focused on the topic were retrieved from websites
of these organisations.
• Other sources of data: books, grey literature and author experiences.
.. Inclusion and exclusion criteria
Inclusion criteria include: (i) only articles published in English; (ii) articles on
health insurance, national health insurance and social health insurance with FFS,
capitation, case-based and global budget; (iii) articles from LMIC context and (iv)
articles published after 1990 to consider the dynamics in implementing provider
payment mechanisms.
Exclusion criteria include: (i) articles focused on health insurance coverage, premi-
ums and benefit packages; (ii) articles discussing other provider payment mechanisms
such as per diem, line item budget and pay for performance; (iii) articles focused
mainly on developed countries were excluded due to variation from the LMICs context
and (iv) articles published before 1990in order to get the most updated evidence.
. Limitations of the review
The main limitation of this review is the lack of published data from many
LMICs for the analysis of country-specific existing provider payment system.
However, the author has relied on grey literature including internal reports, con-
ference presentations, other government documents and personal experience.
Fortunately, evidence from some LMICs where the widely used FFS payment
mechanism was implemented is available in the literature and has been utilised for
analysis of the existing provider payment mechanism in Section 3.
The author is also aware that there are other mechanisms for provider payment
to tackle the increase in healthcare cost including pay for performance, which may
be seen as a limitation. However, this review focuses only on the above-mentioned
three alternative payment mechanisms mainly because of the experience of their
implementation in LMICs.
In summary, this section described this review as an in-depth study primarily
based on secondary data. It described the conceptual framework and its use in this
review for analysis for provider payment mechanisms. It described four sources of
information used for data collection: electronic databases, search engines, inter-
national organisations’ websites and other sources of information from LMICs. It
highlighted the inclusion and exclusion criteria applied to select relevant papers
for the review. The next section analyses existing FFS payment mechanism and its
contribution to cost escalation in LMIC context.
. Analysing the existing fee-for-service provider payment mechanism
Having discussed the conceptual framework for the analysis of provider pay-
ment mechanisms and the sources of data used in Section 2, this section analyses
Universal Health Coverage
the existing FFS payment mechanism and its contribution in increasing the cost
of health services for LMICs. There is a continuous escalation in the cost of health
services, partly as a result of the implementation of FFS payment for reimburse-
ment of healthcare providers in many LMICs.
. The existing fee-for-service provider payment mechanism in LMICs
FFS is defined as a method for retrospective payment to reimburse healthcare
providers for each unit of service provided [11]; for example, the unit of service can
be a GP consultation or a laboratory test. Evidence suggests that healthcare systems
in many LMICs rely entirely on FFS to reimburse healthcare providers including at
primary care, outpatient departments and hospitals.
.. Fee-for-service incentives to oversupply services and pharmaceuticals
FFS creates strong incentives to provide services with high fee schedules, over-
supply of the quantity of services and irrationally increase utilisation of pharma-
ceuticals; therefore, it leads to cost escalation [6, 12, 13]. Based on the conceptual
framework, the following two subsections will analyse the incentives created by
FFS to increase the volume of supplied services and induce irrational utilisation of
pharmaceuticals as two main contributors for cost escalation in LMICs.
... Fee-for-service incentives to increase the volume of services
FFS leads to excessive use of services by promoting supplier-induced demand
phenomenon since insured patients depend on providers’ information on their
needs for healthcare [5]. This phenomenon is even higher under circumstances of
third-party payers such as insurance-financed services [7]. This is because both
providers and patients do not bear the financial risk for the cost of service provided
[14]. From the author’s experience, this practice can create satisfaction among
patients who believe that high quantities and/or expensive treatments mean good
quality of health care.
From the author’s experience, there is a remarkable perception among insured
patients to overuse healthcare services. This moral hazard is another phenomenon
associated with increasing demand for free or subsidised service [15]. Such phe-
nomena may continue to increase with the existing FFS reimbursement policy. This
has added effect to increase utilisation of services and therefore contributes to cost
escalation.
For instance in the National Health Insurance Fund in Sudan, the diagnostic
and laboratory services account for 89% of all outpatient visits of which 92% was
reported as visits for laboratory tests [16]. This implies significant irrationality in
the use of service induced by FFS payment. This relationship is supported by the
findings of a systematic review study that was conducted to compare capitation,
salary and FFS payment mechanisms. The study revealed that FFS payment results
in more primary care visits, specialist visits and more utilisation of diagnostic and
curative services compared to capitation and salary payments [12]. Similar find-
ings have been reported in Poland, where the average number of visits for dentists
contracted under FFS payment was more than double compared to that provided by
salaried dentists [17].
FFS is known for its potential to increase the number of patient visits to primary
care, specialised, diagnostic and curative health services [12]. As thus, it contributes
to the increased volume of provided services to meet the interest of providers lead-
ing to cost escalation.
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
... Fee-for-service encourages over utilisation of pharmaceuticals
The cost of pharmaceuticals represents a big proportion of overall healthcare
expenditure in LMICs (in some cases reached more 50%). During the past two
decades, many interventions were implemented in various LMICs, including
enforcement for implementing essential drug lists and increasing awareness
among prescribers through rational drug use activities. However, the cost of
pharmaceuticals continues to represent a high proportion of overall healthcare
expenditure in many LMICs. Evidence from Taiwan showed that 94.3% of
hospitals aggressively cut the costs of pharmaceuticals as a response to the shift
from FFS to a case-based payment that was implemented by the National Health
Insurance Programme in 1995 [18].
From the author’s experience, the pharmaceutical industry is also adding pres-
sures on doctors to prescribe new medicines with a higher and sometimes unjustifi-
able cost. Under the FFS environment, where there are no limits for reimbursing
medicine prescriptions, this factor represents one of the major challenges for health
insurance schemes to control the cost of pharmaceuticals.
The absence of Standard Treatment Guidelines (STGs) for use of pharmaceu-
ticals in many LMICs (except for few conditions such as malaria and tuberculosis)
has worsened the situation and added more incentives for providers to irrationally
supply expensive and more quantities of medicines. For example, according to the
author, a doctor can prescribe cefixime capsules to treat typhoid fever instead of
chloramphenicol capsules as first-line treatment. The former drug could be 10 times
more expensive than the later, which significantly contributes to the overall cost of
treating typhoid fever cases. The author considers the absence of STGs for pharma-
ceuticals as one of the major challenges for LMICs to control cost escalation under
the current widely used FFS payment system.
Co-payment or cost-sharing may be considered as a way to minimise the effect
of FFS on cost escalation. However, evidence from Korea revealed that co-payment
alone is not sufficient to tackle the increased volume of health services induced
by healthcare providers [5]. Therefore, additional measures might be required to
control the rising cost of pharmaceuticals for LMICs.
.. Administrative cost of fee-for-service
The administrative cost for FFS payment is generally higher compared to other
provider payment mechanisms since the insurer is required to process the auditing
of detailed provider claims retrospectively based on smaller units [5]. From the
author’s knowledge, the poor management information system (MIS) has a negative
impact on the administrative efficiency to check the accuracy of data submitted
by providers. However, FFS has an advantage that the system is easy to design and
implement with minimal institutional capacity and training [1].
. Moving away from fee-for-service
As seen up to now, the contribution of FFS in increasing the cost of health ser-
vices for LMICs was identified. This section will discuss the need for reform from
FFS to other methods in order to promote cost containment.
Evidence from LMIC has shown a significant escalation of the cost associated
with FFS payment. For example, in Taiwan, the annual per capita health expendi-
ture increased by 15.7% during the period 1980–1994 [19]; and 20% annual cost
escalation was reported in Thailand during the period between 1988 and 1997 as
result of FFS payment [20].
Universal Health Coverage
Due to the unintended effects of FFS, many countries in Asia and Latin America
have implemented different reforms to their provider payment systems. For exam-
ple, Korea and Taiwan implemented reforms from FFS to case-based and global
budgeting mixed payment systems [6, 21]; in Argentina, there was significant
reform where they moved from FFS to capitation payment [6]; and a report from
World Bank suggested that China was advised to move away from FFS in order to
control cost escalation in healthcare utilisation [22].
Based on the evidence explored from LMIC on FFS payment, many LMICs may
need to consider moving away from FFS to improve efficiency and overcome the
problem of cost escalation. The analysis for the alternative payment mechanisms in
the next section will help to propose an appropriate reform for each specific context
based on the best available evidence.
To summarise this section, the problem of cost escalation of health services
for LMICs was demonstrated as partly attributed to the widely used FFS payment
mechanism, as one of the main contributing factors. Then the FFS payment mecha-
nism was analysed, and its potential in promoting excessive use of health services,
rising cost of pharmaceuticals, and its higher administrative cost, were discussed.
Finally, the section concluded with the necessities for LMICs to move away from
FFS towards a more appropriate method for reimbursement of healthcare providers
in order to tackle cost escalation.
In the next section, capitation, case-based and global budget hospital pay-
ment mechanisms will be analysed and the appropriate options for LMICs will be
identified.
. Assessing the alternative provider payment mechanisms
Section 3 discussed the role of the FFS payment mechanism as a contributing fac-
tor to cost escalation and suggested that healthcare systems in LMICs need to move
away from FFS if cost escalation is to be controlled. This section will analyse three
alternative payment mechanisms, capitation, case-based and global budget, and
assess their potential to reduce the cost of health services for LMICs. The key issues
analysed in this section are those illustrated in the conceptual framework (Section 2),
particularly the incentives created by each payment mechanism and the relative
administrative cost.
Unlike the retrospective FFS payment, capitation, case-based and global budget
payments are prospective mechanisms. The term prospective refers to when the
payment rate for a predefined package of health services for the fixed period of time
is determined before the treatment takes place [10]. The units of payment are much
more aggregated ranging from case treated, with case-based to the health facility,
with a global budget [4].
. Capitation payment mechanism
Capitation payment is defined as prospective, fixed payment to healthcare pro-
viders in order to care for a defined population for a defined period of time such as
a year [11]. The key issue is that reimbursement for providers is not linked to inputs
(such as diagnostic tests) or to the volume of service provided. Under capitation
payment, providers bear more financial risk for the oversupply of services; there-
fore, they are more likely to use low inputs in healthcare to retain surplus and make
profits [4, 23].
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
.. Capitation payment incentives
According to Cashin [24], capitation payment can create incentives for providers
for efficiency improvement, the attraction of additional enrollees, an investment in
cost-effective health promotion and prevention interventions.
On the other hand, capitation payment can reduce the quality of care, encour-
ages providers not to enrol risky vulnerable patients and results in increased
referrals to other providers [25–27]. Jegers etal. [26] suggested that this problem
can be solved in the design of capitation payment rates by including risk adjus-
tors (such as age, gender, chronic illness and socio-economic status of enrolled
patients). The aim of this risk adjustment is to compensate providers for the
higher predicted cost for the care of more costly groups of enrollees such as
elderly patients.
Evidence from Thailand has revealed that the introduction of capitation pay-
ment in 1990 turned the main contracted providers into risk bearers. They, there-
fore, became financially responsible for the cost of healthcare for each enrolled
patient [28]. This has created incentives to increase the risk pool by expanding
population coverage through more enrolment and pass the risk to other subcon-
tracted providers [28].
In the following subsections, three aspects affecting the cost of health
services based on the conceptual framework discussed in Section 2 will be
analysed. This will focus on incentives to improve efficiency, reducing volume
and intensity of supplied service and promoting investment in prevention of
diseases.
... Capitation incentives to improve providers’ efficiency
Capitation payment creates strong incentives to promote efficiency in the use
of resources [4]. Since providers bear more financial risk for services they provide
under capitation payment, they are more likely to control cost by selecting rational
and cost-effective services [5]. This is because when providers achieve efficiency
gains and spend less than the per capita allocated budget, the difference between
revenue and expenditure is maximised, and this surplus is retained by the provider
as profit. On the other hand, if a provider runs out of budget, there is no additional
payment under the capitation system [24].
Efficiency under a well-designed capitation payment system is promoted by the
autonomy and flexibility in the use of resources [1]. This is because the available
resources are closely linked to the number of population to be served as well as the
health needs of each population [10]. This formula does not only encourage cost
minimisation but also improves equity in the distribution of healthcare resources
according to the health status of a population [1]. This directs providers to put more
emphasis on primary and outpatient care rather than specialised and inpatient
services [25].
The degree of incentives created by capitation payment depends on many
issues including the health insurance benefit package, the regulations and medi-
cal practices existing in the system to prevent risk selection and the healthcare
market structure [5]. For example, the availability of other competing providers
in the same field encourages efficiency and patient satisfaction. Fortunately,
the current health market structure in many LMICs can encourage competition
because of the availability of enough numbers of healthcare facilities to ensure
competition.
Universal Health Coverage
... Capitation incentives to reduce the volume and intensity of supplied services
Capitation payment can effectively achieve the cost reduction goal by creating
incentives for providers to control inpatient admissions and the average length of
stay, and review the medical necessity for providing each service [29].
In addition, providers may sacrifice the quality of health services in order to con-
tain costs [10]. Although quality is not the focus of this study, there is a continuous
fight between reducing cost and improving quality of health services. Policy makers
in LMICs need to make the necessary measures to ensure good quality of care under
the expected reform in the provider payment system.
In Thailand, capitation payment was introduced in 1990 with the primary
goal to contain the cost of healthcare [10]. As expected, evidence from Thailand
has shown that providers responded to capitation incentives by greatly shifting
to ambulatory outpatient care and reduced the inpatient services [6, 10]. To
cope with this reform, providers undertook certain measures to reduce their
cost for managing patients; for example, some hospitals dropped payment for
doctor consultations by 30% for Social Security patients compared to regular
patients [20].
... Capitation incentives to invest in health promotion and disease prevention
When capitation payments are contracted for long-term periods with additional
bonuses as incentives, providers invest in improving the health status of popula-
tions through more cost-effective health services like promotion and prevention
interventions [5, 24, 29]. In Nicaragua, for example, capitation payment introduced
in 1994 resulted in the adoption of a mixture of services with more emphasis on
prevention and primary care than specialised high-level care [25]. This ultimately
resulted in a reduction in the overall bill of healthcare for the Social Security
Institute in Nicaragua [25].
.. Administrative cost of capitation payment
This is significantly lower than that of FFS because there are no claims to be
processed on the insurer side [5]. Instead, the insurer is only required to audit the
number of enrollees per provider to make the payment. However, a well-function-
ing referral system is required to ensure the cost-effectiveness of treatment at the
selected level of care [10].
Administrative costs for managing capitation payment may increase if the health
insurance decides to intervene in minimising risk selection by adding risk adjustors
such as gender, age or chronic illness of enrolled patients [5, 24]. In such situations,
the insurer incurs a more administrative cost for monitoring and tracking patients’
enrolment for each provider. Although this can be a negative effect that increases
cost, it promotes equity in healthcare and contributes to the overall aim of social
health insurance schemes in LMICs.
. Case-based payment mechanism
Case-based is a prospective reimbursement mechanism in which hospitals are
paid for each discharged inpatient case, based on a previously defined rate for each
group of cases with similar clinical conditions and resource requirement [30]. The
International Classification of Diseases (ICD) developed by WHO is widely used to
define these groups for the purpose of setting payment rates [1].
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
.. Case-based payment incentives
Case-based payment mechanism provides significant incentives for cost reduc-
tion [5, 31, 32]. The output-based design of this method has generated major
incentives for providers to contain cost per case by minimising the use of resources
utilised per case [5], for example, reducing the unnecessary utilisation of diagnostic
and imaging services.
Unlike FFS, case-based payment has the potential to create incentives for pro-
moting hospital efficiency and control the cost of healthcare [1, 24, 33]. However,
it also encourages contracted hospitals to unnecessarily increase admissions and
readmissions, reduce the intensity and quality of care, avoid severe cases and shift
patients for outpatient and community care for follow-up [24, 33].
Based on the conceptual framework, the following three subsections will analyse
the relevant incentives that contribute to the cost of healthcare under case-based
reimbursement.
... Case-based payment promotes hospital efficiency
Hospital efficiency under cased-based payment is promoted through minimis-
ing the inputs used for case management and reducing the average length of stay as
intended effects [24, 31, 33]. This is because hospitals are paid a fixed rate for each
case regardless of the volume and intensity of service provided.
Case-based payment has been effectively used in many LMICs as a tool to
control cost escalation during the past four decades. Stronger incentives to promote
efficiency by controlling resources used per case were observed in Korea, Taiwan,
Indonesia, China and Kyrgyz Republic [1, 18, 34]. For example, in Korea, the
introduction of case-based payment in 1997 resulted in a 30% reduction in the use
of antibiotics for inpatient care [21].
In Latin America, case-based payment has also been in existence for the past
30years, including in Argentina, Brazil and Chile [10]. In Brazil, for example, a
mixed case-based and FFS payment system was introduced for reimbursement of
both public and private healthcare providers [6]. Although this reform has created
incentives for efficiency, evidence has shown that the low reimbursement rates
have resulted in negative effects including the deterioration in quality of care and
reduced utilisation rates [6, 10].
... Case-based incentives to increase admission rates
A common problem with case-based payment is that it creates incentives for
hospitals to increase admission and readmission rates [33]. However, one of the
major advantages associated with case-based payment is the reduction in the aver-
age length of stay [24, 35], and it may create incentives for improving quality of care
if payment rates are linked to the complexity of cases [10]. For example, the pay-
ment rate for complicated normal deliveries is higher than non-complicated ones.
In the Korean reform, the average length of stay has dropped by 3% on average
as a response to case-based implementation [21]. The outcome of implemented
case-based payment in Kazakhstan during the period 1988–2001 has resulted in a
stabilised number of hospital admission rate, a decline in inappropriate admissions,
and the average length of stay has dropped by 2days on average [24].
In Taiwan, evidence has shown that during the first half year after implementa-
tion of case-based reform, both the average length of stay and cost per caesarean
section admissions dropped significantly [6]. This reform has been confronted with
Universal Health Coverage
resistance from providers in Taiwan, but the insurer has utilised historical claims
data to fairly set the case rates in order to minimise resistance from providers [6,
19]. Consequently, the coping strategies used by hospitals for inpatient admissions
in Taiwan as a response to the implementation of case-based payment generally
resulted in significant positive outcomes towards cost control [18].
... Case-based incentives to reduce the intensity of care
Case-based payment has other major disadvantages including incentives to
reduce the intensity of healthcare by prematurely discharging admitted patients,
up-coding to higher classes in the payment schedule and shifting patterns of care
and costs to non-case-based classes where mixed payment systems are used [1,
5]. The behaviour of premature discharge shifts the cost of healthcare from the
hospital to the outpatient services and community outreach care, which contributes
to increasing the social cost for healthcare. It could also result in high readmission
rates [36].
Evidence has shown that up-coding to a higher point practised by providers was
not random, but it was systematically favoured by providers and mainly driven by
their interest to obtain larger reimbursements [5]; and if the insurer has not taken
appropriate measures to reduce this behaviour, the cost of healthcare will increase.
However, Kwon [31] suggested that if the level of care is too high due to the
oversupply of services, then the reduction in the intensity of care as a result of
implementing case-based payment does not affect patient outcome negatively.
Evidence from the Taiwanese experience also supports this point, where irrational
use of antibiotics for inpatients was reduced by 30% to cope with case-based
payment [18].
.. Administrative cost of case-based payment
The administrative cost of the case-based payment system primarily depends on
the complexity of design for case grouping. The cost of administrating very com-
plex case-based payment is very high for both providers to code cases, and for the
insurer to monitor and process provider claims [5]. However, this cost can be lower
than FFS in simply designed systems such as those used in Indonesia in the 1990s
[5]. In Korea, the relatively high requirement for clinical and managerial informa-
tion for case classification has been evident [31].
To avoid the higher administrative cost, less complex case-based systems can be
designed based on broader categories of case grouping [1]. This approach has also
been proposed by Kwon [31], to adopt an incremental implementation of the new
case-based system starting with a simpler classification of diseases.
. Global budget hospital payment mechanism
Global budget payment is defined as an aggregate cash sum, fixed in advance,
intended to cover the total cost of a service provided, and it is usually set for
1year ahead [37]. While the unit of payment in capitation payment is per
enrollee, in the global budget, the facility is used as a unit of payment based on
previous historical spending, the volume of service and hospital bed size, which
are brought together in a resource allocation formula [1, 38]. Global budget pro-
vides a greater degree of hospital autonomy and increases transparency through
the ease of auditing and accountability for allocated budgets and contributes to
macro-economic efficiency [38].
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
Based on the middle purple column of the conceptual framework (Section 2),
the following subsections will focus on the analysis of incentives created by global
budget payment and the relative administrative cost to run the system.
.. Global budget payment incentives
Global budget has a positive effect on controlling health insurance cost by
creating incentives for hospitals to reduce the volume of services provided and
encourages efficient resource utilisation [5]. Depending on the resource allocation
formula, global budgeting has both positive and negative effects on the admission
rate and the average length of stay in hospital [14].
... Global budget incentive to reduce the volume of services
With global budget, the volume of healthcare provided is minimised by
hospitals due to the shared financial risk [39]. In the short term, the volume of
healthcare and use of input resources are minimised and, therefore, can pro-
mote hospital efficiency [1, 5]. However, in the long-term period, the degree of
incentives brought by this mechanism depends mainly on the resource alloca-
tion formula [5] and budget adjustor such as age, sex, morbidity and utilisation
rates from previous years [10]. In this regard, policymakers of the health insurer
need to keep their attention while using historical data for allocating resources
to hospitals, because there are greater chances of repeating existing patterns of
resource use. For example, if a non-efficient hospital is receiving global budget
based on previous data, without consideration to other adjustors, inefficiency will
continuously persist.
Based on the logic discussed above, if other resource allocation adjustors and
performance measures are not considered, global budgeting will reward inefficient
hospitals (higher spending now to ensure higher budget next year) [38].
... Effect of global budget on admission rate and the average length of stay
The admission rates are also reduced under global budgeting since contracted
hospitals bear some financial risk [4, 5]. When performance measures are
introduced in the resource allocation, incentives among hospitals may change as
a response to the chosen indicators [38]. For example, in Hungary, the average
length of stay increased because global budgets were allocated based on occu-
pancy rates [5].
The major disadvantages of global budget payment are that it is not reflective of
the actual activities carried out by the hospital, but rather it is based on the hospital
bed capacity [38]. Unfortunately, complicated cases are also treated with the same
level of funding, which may lead to the referral of severe cases [10, 38]. This can be
minimised by introducing more complex resource allocation formula to reflect the
severity of cases [10].
.. Administrative cost of global budget
The administrative cost of the global budget is generally lower compared to
other payment methods [5]. This cost is mainly brought by the resource allocation
formula and there are no bills to prepare and no claim audits [1]. But, this cost may
increase when using more complex resource allocation formulas such as risk-
adjusted or utilisation projection components in the formula [5, 38].
Universal Health Coverage
The administrative cost is also possible to increase by introducing better moni-
toring of performance measures such as result-based assessment and evaluation for
hospitals contracted under a global budget [38, 40].
. Which payment mechanism is the best for LMICs?
Policy makers in LMICs need to understand that all provider payment
mechanisms have advantages and disadvantages and there is no perfect method.
Langenbrunner [41] stated that “the whole point of provider payment systems is
to change behaviour”: that is, to change the way healthcare providers operate in
response to different incentives discussed in this study under each method while
achieving the policy objective of cost containment.
Mixed payment systems are widely used in different countries in Asia and
Latin America: for example, (FFS, case-based and capitation) in Kyrgyzstan and
Argentina, and (FFS and case-based) in Chile and Brazil [10]. The mixed system
is adopted for practical reasons to counter the adverse incentives of using pure
payment mechanisms [5]. For example, hospitals can be reimbursed on case-based,
while primary care centres can be paid on a capitation basis. Mixed systems can
even be used for one provider. This has been successful in Thailand where hospitals
are reimbursed on a global budget to cover fixed costs and partly on case-based to
cover variable costs for emergency cases [42].
According to Wouters [10], three main issues need to be considered when pre-
paring for a payment system reform: (i) the potential of the payment mechanism to
control cost; (ii) the supporting system requirement for implementing the new pay-
ment system and (iii) the expected effect on quality of care. Since quality of care is
out of the scope of this review, only the first two elements (i and ii) are summarised
in the following two subsections.
.. The potential of alternative payment mechanisms to control cost
Based on the analysis for provider payment mechanisms, the discussion above
summarised the findings of key incentives and administrative costs for the three
alternative payment mechanisms. The summary of findings from the analysis of the
existing FFS payment is presented for comparison purposes (Table ).
As you can see in Table , each of the alternative payment mechanisms cre-
ates both positive and negative incentives and all of them are technically feasible
to reduce healthcare costs. However, case-based has higher administrative cost
compared to capitation and global budget. In terms of organisational feasibility, the
case-based method also requires a higher institutional capacity to run the system.
Therefore, capitation and global budget may be the most viable options for LMICs.
.. Supporting system requirements for implementation
The success of provider payment mechanisms cannot be achieved as stand-alone
interventions; other supporting measures are equally important including legal,
financial, referral, quality assurance and MIS [10]. For example, capitation pay-
ment requires a very well-developed referral system to operate effectively, while
case-based payment relies on a well-designed and functioning information system
to ensure accurate coding and keeping clinical records for each case managed.
Figure illustrates the relative level of complexity for supporting system require-
ments for implementing provider payment mechanisms.
To summarise this section, the three alternative provider payment mecha-
nisms were analysed: capitation, case-based and global budget. The conceptual
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
framework was used in the analysis and assessed the positive and negative incen-
tives created by each payment mechanism. The relative administrative cost to run
each of these mechanisms and their potential in controlling the cost of health
services were also analysed. The relative requirements for supporting systems to
run each of the alternative provider payment mechanisms were also identified and
compared.
The next section will present the conclusions of this study and potential mea-
sures for provider payment reform in LMICs.
Figure 2.
Supporting system requirements. Source: adapted from [10].
Payment
mechanism
Incentives Administrative
cost
Capitation + Improves provider efficiency
+ Reduces volume and intensity of service
+ Invests in health promotion and disease prevention
− Selection of healthier enrollees
Low
Case-based + Improves hospital efficiency
+ Reduces the volume of inputs
− Increases admission and readmission rates
− Reduces the intensity of care
High
Global budget − Reduces the volume of supplied services
± Increases or decreases admission rate and averages length of
stay depending on resource allocation formula and performance
measures
− May reward inefficient hospitals
Low
Fee-for-
service
− Does not promote provider efficiency
− Increases volume of supplied service
− Overutilization of pharmaceuticals
+ Improves access to healthcare
High
Key: +, positive incentives; −negative incentives.
Table 1.
Findings from analysis for provider payment mechanisms.
Universal Health Coverage
. Conclusions
. General conclusions
This chapter discussed the problem of cost escalation for providing healthcare
in LMICs and analysed the existing FFS payment method for reimbursement of
healthcare providers as the main contributor to this problem.
FFS payment significantly contributes to cost escalation by creating incen-
tives for providers to unnecessarily increase the volume of supplied health
services and irrationally increase the utilisation of pharmaceuticals. Moreover,
the administrative cost of FFS is relatively high compared to capitation and
global budget payment mechanisms. Evidence from LMIC in Asia and Latin
America revealed a number of reforms during the past four decades where they
moved away from FFS to prospective payment mechanisms to promote cost
containment.
Fortunately, the analysis of findings from the assessment of the alternative
provider payment mechanisms has demonstrated the potential of these methods in
controlling cost and promoting efficiency. Capitation payment and global budget
hospital payment mechanisms may be the two viable alternative options for imple-
mentation in LMICs.
Both capitation and global budget payment mechanisms create strong incentives
for providers to reduce the volume of supplied health services and their administra-
tive cost is low compared to the existing FFS payment method. Capitation payment
has the potential to promote provider efficiency, while global budgeting may
negatively reward inefficient hospitals if risk adjustors (such as gender and age) are
not applied in the resource allocation formula.
Interestingly, capitation payment encourages healthcare providers to invest in
health promotion and disease prevention activities to improve the health status of
enrolled populations, but it can also discriminate against enrolling risky vulnerable
and costly groups and select healthier enrollees.
Mixed provider payment systems can be used to absorb the adverse effects of
using a pure payment mechanism and also for practical reasons in implementation.
The success of implementing capitation and global budget payment mechanisms
in LMICs requires other supporting systems with different degrees of complexity.
Therefore, LMICs need to invest in strengthening both the financial information
system and MIS.In addition, the utilisation management and quality assurance
systems need to be introduced in the contractual requirements where separate pay-
ers such as health insurance schemes exist.
. Potential measures for provider payment reform in LMICs
Based on the existing evidence and analysis provided in this chapter, a set of
technically feasible potential measures is proposed for LMICs. The measures are
summarised in two groups: short-term and long-term measures with a discussion
of the feasibility (organisational, financial and cultural) for implementing each of
these measures in LMIC context.
.. Short-term measures
• Adopt a policy reform for gradually shifting away from FFS towards the
implementation of capitation and global budget provider payment mechanisms
for reimbursement of healthcare providers.
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
• Fair setting of reimbursement rates in the new payment system is required to
avoid resistance from healthcare providers that may arise as a response to the
proposed reform.
• Design of a mixed provider payment system with the following directions:
○Capitation payment for reimbursement to primary care facilities.
○Global budget payment for smaller and district hospitals.
○FFS payment may remain as a method for reimbursement to outpatient
departments and specialised healthcare, where appropriate.
• Make the necessary measures to keep the quality of healthcare at an acceptable
level under the newly designed provider payment system as part of reform
packages.
• Design and implementation of payment system reform are lengthy
and detailed processes and need a legal framework for implementation
(legislation).
• Recruit technical support from World Bank, WHO or other specialised institu-
tions for designing the new provider payment system, which should include
setting the payment rates, resource allocation formula, billing system and
improving the institutional capacity to run the new system. Technical support can
be obtained through multilateral or bilateral development of cooperation projects.
• Strengthen the supporting systems to the relative degree of requirements to
run the new provider payment system. These include the financial informa-
tion system, MIS, integrated referral system and utilisation management and
quality assurance system.
• A large amount of financial investment, as well as training for human
resources to administer the new system, is required.
.. Long-term measures
• Evaluate the newly introduced provider payment system to assess its effective-
ness in controlling the cost of health services and make periodical adjustments
for payment rates based on data generated from the previous experience.
Awell-functioning MIS and reasonable financial budget are required to
conduct this evaluation.
• Expand capitation payment for reimbursement of health services provided at
the primary care level. All supporting systems are required to be functioning to
a higher degree of complexity.
• Expand global budget payment for reimbursement of contracted hospitals.
A well-functioning MIS is required to apply risk adjustors (such as age and
sex) in the resource allocation formula. Financial and human resources need
to be mobilised for monitoring and evaluation of performance measures for
participating hospitals.
Universal Health Coverage
Author details
AbualbishrAlshreef
School of Health and Related Research, University of Sheffield, Sheffield, UK
*Address all correspondence to: a.o.alshreef@sheffield.ac.uk
Acknowledgements
The author acknowledges that an early version of this report has been submitted
in partial fulfilment of the requirements for the award of Master of Public Health
(International) at Nuffield Centre for International Health and Development,
University of Leeds, UK.
© 2019 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms
of the Creative Commons Attribution License (http://creativecommons.org/licenses/
by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,
provided the original work is properly cited.
Provider Payment Mechanisms: Effective Policy Tools for Achieving Universal and Sustainable…
DOI: http://dx.doi.org/10.5772/intechopen.86840
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