Francisco von Hafe, our Economist, shares his ideas on healthcare payment models

Aging is a phenomenon that poses unique and unpredictable challenges to society. The great majority of older patients report having multiple conditions and morbidities. However, most payment systems are not prepared to deal with these populations, for whom new care models are needed that “span across different levels of care” (OECD, 2016).  

Most of the common ways of paying providers are not aligned with the new objectives of defining a payment method that covers the older patient’s needs. Hence, new payment structures are being explored by policymakers as a strategy to improve the quality of the provided care and to reduce costs (Yong, 2010).  

I would like to challenge the reader to imagine a scale line that goes from paying for each medical act to pay for the whole care cycle. Now, please, place over that line the following four payment methods in that order: 

  1. Fee-for-service 
  2. Payment per case (Diagnosis-related group) 
  3. Bundle Payment 
  4. Capitation  

In the following paragraphs, I will try to describe those payment methods. 

 

Fee-for-service 

It is a payment method where healthcare services are unbundled and paid separately. Meaning that the payer reimburses according to the received treatment.  This method is often criticized as it may incentivize physicians to over-treat patients, formally, to induce demand. A consequence of this payment method is the non-control of costs. According to Porter and Kaplan (2016) fee-for-service awards quantity over quality, posing an obstacle to improving the quality of healthcare delivery.  

 

Payment per case (Diagnosis-related group) 

 This method classifies patients based on their diagnosis. Patients who belong to the same group are expected to have a similar treatment, hence reporting a similar clinical evolution. Thus, costs are not expected to vary widely across patient groups, as it covers all costs from the moment of admission to the moment of discharge. Mihailovic et al. (2016) state that payments based on diagnosis-related groups increase efficiency and transparency and reduce the average length of stay. However, it has been discussed that it may instigate hospitals to increase the number of patients or to discharge patients too early.  

 

Capitation 

 Care providers receive a fixed amount of money for each patient or group of patients assigned to them, per a specific period, whether or not that person seeks care (Berwick (2016)). The payment is made in advance; thus, it is based on the average expected health care utilization of that group of patients, with payment for patients generally varying by age and health status. Capitation can be used in almost any medical condition, from primary care to surgery.  

 This method requires risk sharing between the payer and the healthcare provider. For example, if the actual cost is lower than the value of the payment, the healthcare provider will profit. As so, hospitals will have incentives to lower the costs. Porter and Kaplan (2016) criticize this system as it may create competition in costs, rather than in relevant outcomes for patients.  

 

Bundle Payment 

Based on payment schemes used in other industries, bundled payment consists of paying, at the moment of admission, for the full cost of treatment, for the entire care cycle. One can see this method as a middle option between fee-for-service and capitation, as the risk is shared between payers and providers. 

The main difference between this method and capitation is that the payment is contingent to reach outcomes that are relevant to the patient and only includes treatments that are related to the condition (Porter and Kaplan (2016)).  

Implementing bundled payment requires, first of all, measuring the outcomes that most matter to patients (clinical and patient-related outcomes). Second, it is necessary to clearly define the pathway that the patient goes through and, finally, the exact cost of each activity.   

Finally, in this method one can integrate different levels of care, meaning that different specialists or even facilities, can be involved in the care provision.  

In this context, Value for Health CoLAB is defining patient pathways and conducting the respective cost and outcome analysis (CUFIOT4AHA (https://www.activageproject.eu), SANTA MARTA (https://vohcolab.org/projects). The aim will be to research on bundled payment strategies for the elderly. 

All in all, different methods are used in different countries. Researchers have not reached, yet, a conclusion on what is the best one. However, according to OECD (2016), the best method might be the one that mixes all methods that are placed over that line.  

 

References  

Better Ways to Pay for Health Care, OECD Health Policy Studies, OECD Publishing, Paris,  

Berwick, D (1996). “Payment by Capitation and the Quality of Care”, The New England Journal of Medicine   

Mihailovic, N., Kocic, S., & Jakovljevic, M. (2016). Review of Diagnosis-Related Group-Based Financing of Hospital Care. Health Services Research and Managerial Epidemiology.   

Porter, Michael E., and Robert S. Kaplan. “How Should We Pay for Health Care?” Harvard Business School Working Paper, No. 15-041, December 2014. (Revised February 2015.)  

Yong PL, Saunders RS, Olsen LA, editors. The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary. Washington (DC): National Academies Press (US); 2010. 11, Payment and Payer-Based Strategies.