Reform of Hospital Payment System

• Abstract
• Purpose of health policy or idea
• Characteristics of this policy
• Political and economic background
• Purpose and process analysis
• Expected outcome
• References

Abstract

The current French government, elected in June 2002, has announced that both public and private hospitals should move to a prospective payment by activity (i.e. a payment per DRG, complemented by payments for specific activities or missions, which would also be calculated according to the level of production measured through relevant units of account).

Purpose of health policy or idea

Currently the payment of hospitals varies according to their status:

• Public and private non profit hospitals have global budgets. These budgets are determined through a top-down procedure : a national budget is defined by the Ministry of Health, and then is divided between the regions, with the aim of reducing regional inequalities. The adjustment is made on the basis of a formula that takes into account needs and productivity. Once the regional budget has been set, the regional hospital agency distributes it among hospitals, mostly on historical basis, making some adjustments to take into account the efficiency of the different hospitals (measured by the cost per DRG), and the specific goals of the hospital planning process. Once its budget is fixed, each hospitals receives a block grant every month from the sickness funds.
• Private for profit hospitals (one has to remember that private for profit hospitals account for 1/3 of obstetrics and almost half of surgery) have an itemised billing system, with different components: daily rates covering the costs of accommodation, nursing and routine care, drugs and minor supplies; a payment based on the technical environment that is directly linked to the nature and scale of the diagnostic and therapeutic procedures carried out ; and separate billing for prosthesis, blood, costly drugs,… Doctors providing treatment in these private for profit hospitals are paid fee-for-service.

These methods of payments, and the difference of treatment between the public and private sectors, have always been a subject of debate.  The private sector advocates that global budgeting rewards inefficiency, and prevents a real benchmarking process that would inevitably demonstrate that private hospitals have a higher productivity. And it is true that indicators such as the number of procedures per physician or operating room are higher in the private sector, as are the costs per DRG for the most current procedures (in which private hospitals are specialized). The public sector replies that it has constraints (emergency care, out of hours care) and missions (research and teaching at least for university hospitals) that private hospitals do not perform, and that it explains the difference in costs. Moreover, public hospitals claim that with global budgeting they face rationing and have to give up activities because their funding is not sufficient, whereas private for profit hospitals are always paid for what they do.

The issue of an activity-based payment which would harmonize the rules of the game for the two sectors has then been often considered.

A previous law passed during the nineties had already foreseen a move towards a payment per DRG, but the deadline given by the law has been postponed several times and the project was never implemented.

The current Government, elected in June 2002, has announced a few months ago that beginning in January 2004, both public and private hospitals should move to a prospective payment by activity (i.e. a payment per DRG, complemented by payments for specific activities or missions, which would also be calculated according to the level of production measured through relevant units of account).

So this is not a new project, since it has been on the political agenda of previous Governments, and there has been a lot of technical work done to prepare the reform, but the current Government is obviously firmly committed to a rapid implementation.

Main points

Main objectives

The expected outcomes are : a fair competition between the public and private sector, having the same payment mechanisms ; transparency on costs and efficiency among hospitals, both private and public ; incentives for productivity at the DRG level (viewed as a relevant intermediate between the itemised billing, which does not provide an incentive to increase the efficiency of the global process of care, and the global budget which does not provide any incentive for efficiency at all - though this is not quite true, because the regional agencies may adjust the budgets according to efficiency).

Innovationsgrad	traditionell		innovativ
Kontroversität	unumstritten		kontrovers
Strukturelle Wirkung	marginal		fundamental
Medienpräsenz	sehr gering		sehr hoch
Übertragbarkeit	sehr systemabhängig		systemneutral

Political and economic background

Even if at first sight it might be considered as a continuation of the previous political direction, the overall philosophy underlying this policy seems rather different.

It is true that the idea is not new : as it was said before, previous Governments announced reforms of the payments mechanisms based on DRGs. In this respect, one can say that the current Government, newly elected, is more pragmatic and has decided to implement already existing "good ideas".

The change may be more fundamental though, because there has always been in France a conflict between two philosophies of regulation : one based on planning, and one based on competition and incentives. This probably one reason for which the project of DRG-based payment, which is clearly in favour of the second one, has been studied a lot but has not been implemented so far.

In that respect the project of reform of the payment mechanism supports a liberal view of regulation of the health care system. It is consistent with other policies orientations that lead to less authoritative planning and more room left for individual actors in the system.

For example, moving towards prospective payment per DRG makes sense if hospitals gain autonomy, so that they can be accountable for their costs. Currently public hospitals have to comply to a lot of norms and regulations, their employees are civil servants whose wages and conditions of employment are centrally defined, until recently the physicians were appointed by the Ministry and not by the hospital director, etc.

Strengthening public hospitals autonomy is one of the objectives included in the five-year plan "Hospital 2007", in line with the reform of payment.

More globally, hospital planning is considered less important (for instance the bed-population ratios currently used to determine the level of equipment by geographical zone will be abolished) ; the prevailing idea is to release the administrative constraints on providers while giving them incentives to be efficient.

Purpose and process analysis

Current Process Stages

	Idee	Pilotprojekt	Strategiepapier	Gesetzgebung	Umsetzung	Evaluation	Veränderung/Richtungswechsel
Implemented in this survey?

Origins of health policy idea

As it has been said already, the idea is not new.

It was first launched during the socialist Government who came in power in 1991. In 1982, the Director of hospitals of the Ministry of Health, Jean de Kervasdoué, decided to implement the DRG information system in France. His idea was that this instrument should eventually complement the global budgeting reform, i.e. that it would be used to calculate the individual hospitals budgets (until 1983, public hospitals were financed through a per diem rate, which was calculated to balance the hospital budget, thus there was a retrospective payment of all incurred costs. In 1983, the per diem rate was replaced by a global budget, with the Ministry of Health fixing a tight constraint on the rate of growth of these budgets).

The reluctance of public hospitals to give information on hospital stays was rather strong during the first years. This was partly a reluctance of physicians to be accountable for their activity, and partly a fear that this information would be used to reduce the funding of hospitals.

It took some years before the information was collected exhaustively in all public hospitals. This was a whole process, including the implementation of information departments in every hospital, of a quality control process of the data provided, etc. During 10 years the policy orientation changed several times between promoting the use of this information system as an internal instrument for hospitals or using it in a payment mechanism.

At the beginning of the 90s all public hospitals collected standardised data on hospital stays which were centralised. An experiment was the conducted with a sample of private for profit hospitals to collect the same data. A financial incentive was given to furnish these data, and the quality control process was adapted to the specific organisation of these hospitals. From 1997 the data collection is exhaustive also in the private sector.

In the mid-nineties an experiment was conducted in an entire region (Languedoc-Roussillon) : it involved the collection of DRG data from all public and private hospitals in the region, and a simulation of the results for each hospital of a DRG-payment system.

In the 1999 Act on universal coverage foresaw that beginning in 2000, experiments of DRG-based payments could be conducted in some regions during a five-year period, and a commission was nominated to design these experiments. But nothing had been implemented yet when the new Government came in power in 2002.

During all these years, a lot of technical work has been done, to adapt the classification to the French context, to build a relative index scale, for the public sector and the private sector, to provide evaluations of the extra costs linked to specific missions, to analyse cost variations among hospitals, etc. The technical aspects of this policy have thus been thoroughly covered.

Stakeholder positions

For the moment, the main actors interested in the reform - i.e. the public hospitals on one hand, and the private for profit hospitals on the other hand - agree with the reform, because each one sees his own interest :

• The private sector has always been in favour of the harmonisation with the public sector, because they think that they will demonstrate that they are less expensive and more efficient, and they are sure that they have nothing to loose and everything to gain in such a process.
• The public sector sees in this reform a unique opportunity to escape the global budget, viewed as an instrument of rationing which strangles the most dynamic hospitals and does not allow them to respond to the demand of the population, thus allowing the private sector to gain market shares.

Of course the question will be eventually : who will gain and who will loose, since this is a zero sum game, and how will the money be redistributed ?

Different hypothesis are considered. The most audacious one would be to merge the two national budgets for public and private hospitals into one single budget; and then apply exactly the same DRG fee schedule. Maintaining some separation between the two sectors and using a different fee schedule for each of them would be a more conservative scenario.

The redistribution will depend on the scenario finally chosen. The public hospitals appear to be more expensive on average than private for profit hospitals for current procedures. But the gap will depend on the value attributed to specific activities which will be remunerated in addition of the payment per DRG, such as emergency care, resuscitation (which will not be included in the cost per DRG), palliative care,… and of course teaching and research. Among public hospitals, the teaching hospitals are far more expensive than the other hospitals, and it seems clear that teaching and research do not explain the difference.

So groups of interest among the hospitals may eventually oppose the process if it turns out that they loose a lot compared to their present situation. But so far, the project is rather consensual.

In fact, the stakeholders which are reluctant to the project are more within the administration itself. As it has been said before, there is a strong planning culture rooted in the health care administration, both at the national and the regional level, since the power of the regional hospital agencies derives mainly from the planning procedures.

As it has been said, authoritative planning is clearly less in favour with the present Government. And the new payment mechanisms will give less freedom of decision to the regional agencies than they have now, since they define individual public hospital budgets, often taking into account strategic planning objectives, and can modulate private for profit hospitals tariffs. It is not clear yet what room for manoeuvre they will have in the new payment system.

Influences in policy making and legislation

New legislation will be needed to implement this change in the payment mechanisms of hospitals.

The 1999 Act is not sufficient, since it envisioned only experiments and not a general and definitive reform.

The Government intends to introduce this reform in the next annual act on the funding of social security (every year since 1996, Parliament has passed an act which fixes a projected target (ceiling) for health insurance spending for the following year, and contains new provisions concerning benefits and regulation of the system.

The preparation and preliminary public debates on the content of the law have not begun yet, they will take place from September on. The act will be passed in December.

The Government has announced an immediate implementation and a move of public hospitals from global budgeting to prospective payment as soon as 2004. But it is likely that the implementation will be more progressive.

Adoption and implementation

Although there have been a lot of unsuccessful attempts in the past, and a lot of rhetoric without real action, the chances of implementation appear rather good :

• first because the Government seems strongly determined on this issue, that this move is coherent with a global philosophy of regulation based on incentives and autonomy of providers,
• and that both main actors (i.e. public or non profit hospitals on one hand, private for profit hospitals on the other hand) see their interest in the reform.

The reform will be more acceptable for everybody if the adverse consequences (i.e. decrease in funding) are smoothed down. A first element is the number of years that will be decided to reach the target (i.e. to move from historical payments to prospective payment by DRG/activity). It would be of course easier if some additional money was put into the system, but the current financial situation of the sickness funds does not provide much room for that.

Monitoring and evaluation

The process of implementation and monitoring is not finalized yet.

Among the undesirable effects, the potential impact on quality of DRG-based prospective payment has been already widely documented and debated in various national contexts. Providers ma have an incentive to skip on quality to save money, or to avoid heavy cases and select the more profitable ones within a DRG. To avoid this, a quality monitoring process will be implemented through a set of indicators built by the Ministry of Health.

Some technical aspects of the payment mechanisms aim also at avoiding cream skimming and/or undue profits or losses for some hospitals. For instance, the choice to remunerate resuscitation care apart from the price by DRG comes from the large discrepancies in costs incurred, for the same DRG, depending on whether resuscitation is necessary or not. This heterogeneity can lead to perverse effects (i.e. the price paid will be profitable for certain cases and will not cover the costs for the other ones).

Surely there will also be a mechanism to monitor the effect on hospitals economic situation. Adjustments of the pace of implementation or of some technical aspects of the method of payment will be probably made if this monitoring process shows undesirable effects.

Expected outcome

The general aim of the reform is to remunerate all hospitals in a fair and efficient manner.

The extent to which it will enhance efficiency will depend on the capacity of hospitals to respond to these incentives, i.e. their ability to control costs. More autonomy for public hospital is the logical complementary policy to achieve this goal. The private for profit hospitals have more freedom of management, even if they have to comply to quality norms.

If it leads to more efficiency, the reform is not a priori a tool for cost-containment. On the opposite, it suppresses global budgeting for public hospitals, which has been a rather efficient tool for rationing if not for enhancing productivity. The incentive built in the new payment system is an incentive to increase activity, to perform more procedures. It is basically a fee-for-service payment, even if the service is a complex process (a hospital stay for a specific case) and not a single item of this process. As we know, all payment mechanisms create particular incentives, and no single payment mechanism reconcile all incentives that one would like to build into the system (increasing productivity and quality while moderating overall costs).

In terms of cost-containment, the result will depend on the way this payment method will be combined with other tools, e.g. global budgets at the national or regional level. These aspects have not been clearly designed yet.

These payment mechanism do not either ensure quality in themselves. They might even create undesirable incentives in this respect, as it has been said before. These incentives have thus to be counterbalanced by appropriate monitoring tools.

Equity is another important goal embedded in this reform, at least in the sense of "equitable competition between providers". All hospitals will have the same rules, will be rewarded for efficiency in the same way and will compete on the same basis to attract patients - provided that the extra costs linked to specific constraints or missions are correctly assessed and paid for. This is important in view of the current debates between the public and private for profit sectors.

The conception of equity underlying this policy is "allowing the same resources for the same activities". Of course another conception is "allowing the same resources for the same needs". The need-based formulas used in some countries to distribute the budgets among geographical zones (according to the size, age, morbidity and deprivation of the population) are in line with this conception. In France, it has been used so far to distribute the national budget for public hospitals among regions. The formula currently used for this distribution takes into account both needs (depending on the size, age structure and mortality of the regional population) and efficiency (measured by the relative cost index of the regional hospitals after controlling for the case mix). In the other sectors (private for profit hospitals and ambulatory care), which are paid fee-for-service, this is impossible.

Moving from global budgeting to prospective payment per case for public hospitals will probably lead to abandon this reference to need, unless these payments per case are regionally adjusted according to the relative situation of each region.

References

Author/s and/or contributors to this survey

Agnès Couffinhal

Empfohlene Zitierweise für diesen Online-Artikel:

Agnès Couffinhal. "Reform of Hospital Payment System". Health Policy Monitor, April 2003. Available at http://www.hpm.org/survey/fr/a1/1