Guest Writer: Mathew Kukla – Payment and Organization of Health Care
Payment and Organization of Health Care
By: Mathew Kukla
As we examined financial mechanisms for health care systems in the previous post, we’ll continue by discussing payment and organizational methods. While hospitals and doctors can be paid via numerous methods, we’ll stick to the four primary ones: fee-for-service (FFS), capitation, salary and salary plus bonus. Most developing nations and few developed ones use fee-for-service, the former because it’s impossible to regulate more complex payment systems due to inadequate resources and laws. In the latter, political pressure from physicians and hospitals make it difficult to do otherwise. Think about the United States briefly; physicians must pay exorbitant amounts for medical schools and (perhaps rightly so) argue that they must make up these costs in practice by charging a set fee for every service provided. Fee-for-service also enables providers to maintain autonomy in a profession that has historically operated independent of large organizations and regulations. The downside is that FFS encourages overuse of services by doctors – a term economists call “supplier induced demand.” Consequently, health care costs for the population rise and risk is shifted to insurance companies, the government and or patients.
Capitation and salary do just the opposite. The former pays doctors a pre-arranged, lump sum of money for a given group of patients, and physicians must see these patients whenever they need care; as one expects, salary is nearly identical except doctors do not receive patients in groups. Insurance companies and governments pass on the financial risk to providers, thereby reducing overall health care costs through fewer unnecessary services. However, set revenues mean that providers must keep costs low and have less financial incentive to see sick patients, another term for “risk selection.” Moral objections aside, providers may actually under provide health care services to those most in need. A remedy for all three methods is salary plus bonus, whereby doctors may be given additional income when they meet high quality or outcome standards. This reduces costs yet also provides incentives for physicians to effectively treat patients. Economically speaking, hospitals behave similarly when given identical payment schemes, though they are usually reimbursed by DRG methods (ie. based on the cost of specific patients) or set to global budgets. When considering these payment methods and their effect on individuals, it is crucial to understand that, in the developed world, most health care services are demand inelastic and price will minimally alter patient behavior. In other words, for necessary services patients will continue demanding similar levels of care despite an increase or decrease in price. Conversely, charging higher prices for elective and unnecessary services can reduce wasteful demand, because patients are more responsive to them.
Individuals rightly think of three main, organization styles for hospitals, doctors and insurance companies: private (for-profit), private (non-profit) and public. It is fair to assume that the managerial and operational efficiency of private entities generally outweigh their public counterparts due to greater incentives and flexibility. Nonetheless, it is critical to realize that if too much competition spurs low prices and fewer profits, providers may be more willing to induce patient demand for additional services and less willing to subsidize the poor. Too little competition means that quality of care may decline and prices rise.
In regard to health insurance companies, the outlook is quite different. The challenge amongst these organizations is to harness the power of competition & private industry yet maintain equity & risk minimization for the population – something private, non-profits offer over their counterparts. Yet like hospitals and doctors, even non-profit insurance companies (Blue Cross Blue Shield, for example) require regulation to ensure these goals are achieved. Take Switzerland for example. Health insurance companies that offer basic health care coverage for the entire population are typically private, non-profit and subject to heavy regulation; they are given little freedom to risk select aside from sex and age, must admit anyone who applies and charge a set, community premium to all individuals. Oh, and excessive profits are forbidden. Wealthier patients are, however, allowed to purchase supplemental care (ie. elective services, better hospital care, etc) from private, for-profit insurance companies that are minimally regulated by the government. They can risk select, decline patients and make profit. This system ensures that everyone has some degree of health care coverage, yet allows the market to operate freely at an “advanced” level.
Ultimately, financial reforms are only as effective as a nation’s payment system and organizational capacity. If hospitals and doctors lack managerial incentive, authority and operational competence, even the best financial policies will lead to worse access for patients, high costs and poor quality of care. In the next blog post, I’ll discuss how regulation impacts these three methods and tie them together using examples from other developed and developing nations. In the meantime, here are two additional articles for fun, bedside reading:
http://hsphsun3.harvard.edu/phcf/publications/Hsiao.2007.systemic.view.of.hlth.fin.pdf
