Hospital payment reform

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

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Abstract

The French government is introducing a new case-mix based prospective payment system for all providers with an aim to improve efficiency and harmonise prices and payment methods between the public and private sectors.

Purpose of health policy or idea

The current government decided, in 2003, to introduce a case-mix based prospective payment system for financing hospitals (see survey (1)2003). The new payment system is being implemented progressively in the public sector (public and private not for profit hospitals) as of January 2004. The part of the activities paid by the case-mix instrument will increase gradually each year: 10% in 2004, 25% in 2005, 50% in 2008 and so on. The Ministry of Health will decide the pace of the transition taking into account the problems encountered during the implementation process. It has been announced that by 2012 100% of the hospital activity will be paid by the new system.

Private hospitals on the other hand are being paid entirely by the new case-mix based system, as of March 1, 2005. However, a transition period is allowed where "national prices" will be adjusted for each provider taking into account its own historical costs/prices. The objective is to harmonise the prices for all the providers before 2012.  

Main points   

There are different funding models for public and private hospitals. Also the base DRG (Diagnostic-Related Group) prices used for private and public hospitals are calculated differently. In particular, the prices in the public sector include "all costs" (fixed and variable) linked to medical care, while in private sector wages and technical acts (MRI, scanner, etc.) are paid separately.

For the public sector, the funding model involves three types of payments:

• Payments linked to medical activity: A payment is given for each patient treated in acute care (long-term care and psychiatry are not included) based on the national DRG prices for "public sector". No cost weights are used except regional weights for a few number of regions where the average production cost is higher than the average. The DRG system used (GHS, Groupes Homogènes de Séjours) was developed by the Ministry of Health and has long been in place for data collection. For the activities which are not classified by the DRG system, (such as home hospital, ambulatory consultations, emergency visits) separate fees (tariffs) are defined. There is a list of expensive drugs and medical goods (mostly for cancer treatment) for which a separate payment will be made to cover their entire cost. Extra payments (on top of the DRG payment) will also be made for intensive care depending on the individual status of the institution (type of authorisation given by Regional Hospital Agencies, ARH).
• A fixed yearly grant to finance the standard cost of maintaining emergency care and organ removal and related activities. Budget envelopes will be determined by considering the yearly activity of a provider.
• A specific budget (MIGAC) to finance activities of "public utility".  There will be separate envelopes for education and research related activities, on the one hand, and for activities carried out to meet national or regional priorities (e.g. developing preventive care) or specific public missions (e.g. providing care for precarious groups), on the other. These envelopes will be funded from regional budgets and will be distributed by the regional hospital agencies on a contractual basis following nationally defined rules. For the moment it is not clear yet how the cost of different activities (such as research) will be assessed.

For the private sector, the formula offers a payment for each patient treated in acute care using national DRG "prices for the private sector" and an individual "transition coefficient" calculated for each hospital taking into account its own historical costs/prices. This coefficient is also weighted with the regional coefficient (same as in the public sector) and a technical coefficient (for certain high-tech hospitals). The transition coefficients aim to avoid large changes in hospital budgets from one year to other. The objective is for all of the coefficients to converge to "1" by 2012.

Main points

Main objectives

The stated objectives of the reform are:

• To provide incentives for improving efficiency and productivity in hospitals -especially in public ones; 
• To encourage competition between public and private sector by harmonising hospital accounting systems (although the word "competition" is not explicitly mentioned by the government who prefers to emphasise "equal treatment" of public and private sectors);
• To increase transparency and modernise hospital management.

Type of incentives

Financial

Groups affected

Public and private hospitals, Social security fund (principal payer), Regional hospital agencies

Degree of Innovation	traditional		innovative
Degree of Controversy	consensual		highly controversial
Structural or Systemic Impact	marginal		fundamental
Public Visibility	very low		very high
Transferability	strongly system-dependent		system-neutral

It is too early to make an overall evaluation; until now the goverment managed to take the steps as planned. However, currently it is not clear yet if/how the DRG prices are reflecting the real costs of care in public and private institutions. Finding the right level of payment for different services will be the real challenge.

Political and economic background

The introduction of the new DRG based payment system is part of the current government's (elected in 2002) hospital reform plan "Hospital 2007" which aims to reinforce public hospitals' autonomy and efficiency. Introduction of case-mix based payment is one leg of this reform while the other leg "new management" aims to modernise hospital administration and facilitate self-governance in public hospitals.

Purpose and process analysis

Current Process Stages

	Idea	Pilot	Policy Paper	Legislation	Implementation	Evaluation	Change
Implemented in this survey?

Origins of health policy idea

The idea of using DRG-based instruments to control and finance hospital activity has already been on the reform agenda of several previous governments (both socialist and liberal). The first attempts to introduce a DRG-based information system dates from the early 1980s. However, despite extensive research on technical issues, the actual data collection has not been started until 1996, after the Government (Juppé) announcement that sending DRG statistics to regional hospital agencies was mandatory. Since 2000, data is also collected exhaustively from private hospitals.

The policy orientation has changed several times from promoting the use of this information system as an internal instrument for hospitals to using it as a payment mechanism. But all these years helped to get over the initial reluctance of hospitals to provide information on medical activity and the development and harmonisation of information systems.  In the past 10 years, a lot of technical work has been done, to adapt the DRG classification to the French context, to build a relative index scale, to provide evaluations of the extra costs linked to specific missions, to analyse cost variations among hospitals, etc.

The current government (Minister of Health) announced its intention of changing the hospital system right after its election and has been quite persistent in the implementation. Several pilot projects began as early as 2003 in a number of regions and volunteer hospitals (about 60).

Initiators of idea/main actors

• Government: The Ministry of Health

Approach of idea

The approach of the idea is described as:
renewed:

Stakeholder positions

Rarely has a health reform in France been supported as much as in this case. Both public and private hospitals, medical organisations, and all public institutions involved are in agreement with the major principles of the reform.

The need for more transparency and better management in public hospitals has long been recognised by most stakeholders. Until now, public and private non-profit hospitals were paid by global budgets determined by the Ministry of Health and divided between the regions based on a formula that takes into account regional needs. Regional hospital agencies (ARH) distributed the budgets to hospitals mainly based on historical costs. Although ARHs had the possibility to adjust budgets taking into account hospital efficiency and regional or national priorities, their impact on hospital production has been rather marginal. Public sector hospitals see the global budgets as an instrument of rationing which strangles the most dynamic hospitals and does not give them any room for responding to actual demand. They also wish to have more autonomy in hospital management as promised by the reform.

Private sector hospitals, on the other hand, see the opportunity of improving their market share in the new system, because they think that they will be able to demonstrate that they are less expensive and more efficient. Private hospitals (representing 20% of the total bed capacity) have been increasingly taking over certain areas such as programmed surgery. Currently, 80% of the top five (most frequent) surgical interventions are carried out by private hospitals.   

However, this initial consensus on the reform may not continue for long once the actual implications of the new system are better understood. Both the public and private institutions are already complaining about the level of "prices and tariffs" for 2005. They claim that for the same level of activity they will get less funding. For the moment, it is not possible to verify if the case-mix payment will be accompanied with budget cuts, or not. The methods of calculation and the base prices used are not clear.

In fact, most of the current complaints and reactions concern the problems linked to the implementation process, in particular, delays in the announced calendar and the lack of clear information and transparency. For example, the prices for the private sector were only announced in the beginning of March 2005, not giving any room for preparation to the institutions. Similarly the list of drugs and medical supplies to be paid separately was published very late. The lack of clear information on several technical aspects concerning payments creates confusion. It is difficult for most providers to see clearly what will be their budget situation by the end of 2005.

Another issue of concern is the construction of the "MIGAC budgets" for public hospitals to finance the education, research activity and other "public missions". Both public and private sector expressed concern as to the future size of this budget. The private sector fears that this budget would be used as a mechanism to cover actual efficiency deficits of public hospitals, while public sector has doubts about underestimating the value of their "public mission". But the exercise of assessing the cost of different public activities may improve the transparency of public hospital budgets. 

Actors and positions

Government
Federations of public hospitals	very supportive		strongly opposed
Federations of private hospitals	very supportive		strongly opposed
Regional hospital agengies	very supportive		strongly opposed

Influences in policy making and legislation

The Parliament modified the law concerning the annual funding of social security in 2003 to integrate the case-mix funding in the 2004 budget.

Since 1996, Parliament fixes a projected target ceiling for health insurance spending for the following year, and controls new provisions concerning benefits and regulation of the system. The payments linked to hospital activity come from the social security budget since 2004.

The objective is that hospitals can send their bills directly to social security by 2006. 

Legislative outcome

success

Actors and influence

Government
Federations of public hospitals	very strong		none
Federations of private hospitals	very strong		none
Regional hospital agengies	very strong		none

Positions and Influences at a glance

Adoption and implementation

The implementation process is mainly carried out by the Ministry of health in collaboration with the regional hospital agencies. The national and regional representatives of social security funds and hospital federations are also heavily involved in the implementation process.

Until now most of the energy has gone into implementation of the information systems to enable the data transfer and funding based on DRGs. The government provided extra funding and a common program for improving and harmonizing the IT systems in public hospitals. Technical Agency for Hospital Information (ATIH) has been supervising the technical implementation in hospitals providing them necessary tools and technical assistance. The implementation in the private sector, initially programmed for October 2004, had to be pushed several times to March 2005, but problems with data transfer are expected (regional agencies will compensate any financial loss because of data transfer) for the next couple of months. 

Despite the high level of investment (time and human) required, there were relatively few complaints at this stage, except for the delays in providing data processing tools, organizing technical trainings, etc.

Monitoring and evaluation

At the national level, two specific bodies within the Ministry of Health are in charge of the steering and the evaluation of the implementation process. First, there is an "audit" task force, which monitors and provides technical and strategic help to the institutions having operational problems in switching to the new system. The task force should also provide feedback on different technical aspects of the DRG payment system and propose technical modifications if necessary.

Second, there is a "Committee of evaluation" which will be in charge of evaluating the impacts of the reforms in terms of hospital production (variations in hospital activity due to case-mix payment), overall efficiency and the impact on the quality of care. It is not announced yet how it will proceed to carry out these evaluations. 

Several committees have also been established to follow-up implementation of the reforms in private institutions:

•  regional committees are set up in each region under the responsibility of ARH and consists of the regional representatives of the social security  organisation, and private hospital federations. These committees provide weekly reports on the progress made and problems faced in technical implementation by different hospitals of the region using nationally defined follow-up indicators.
• A national steering committee under the responsibility of the Ministry of Health consists of the directors of hospitals federations and regional agencies as well as relevant administrators in the ministry.
• A national follow-up committee with the same composition of the steering committee but at the technical level. This committee meets every second week and analyzes the data and information provided by the regional committees.

Review mechanisms

Mid-term review or evaluation, Final evaluation (external)

Dimensions of evaluation

Structure, Outcome, Process

Results of evaluation

No formal evaluation is available yet.

Expected outcome

It is too early to make an assessment of the impact on efficiency of individual providers. But at the moment there is no reason for not expecting productivity gains given the incentives inherent in a case-based payment system. Also, the modernization of hospital information systems and better measurement of medical activity should at least help to identify those establishments and areas where there is an efficiency problem. 

One of the challenges associated with the case-mix funding system is refining the formula through continuous assessment of changes in health technology and monitoring perverse effects of the funding system design. Coding bias may encourage providers to accept patients at the low-cost end of the case-based reimbursement category and rejecting others. From this point, it is reassuring that the Ministry of Health has put in place several instruments for monitoring and evaluation.

The extent to which it will enhance efficiency will also depend on the capacity of hospitals to respond to these incentives, or their room for manoeuvre. That is why the implementation and success of the reforms concerning public hospital management (introducing new patient management categories, etc.) is equally important.

As to the issue of overall cost containment, the new system introduces national and regional level expenditure targets for social security concerning its acute care expenditure (public and private). As in many other countries, introduction of case mix funding may be accompanied by budget cuts, for which the providers are not prepared at all. Already the target set for 2005 aims to reduce the expenditure growth rate to 3.6% from 4.5% in 2004. Given that case-mix payment is an incentive for increasing productivity (medical activity), these targets risk being inefficient without setting hospital level caps and targets as done in some other countries.

Also, it is clear that administrative costs will be higher in the new system as monitoring reimbursement will require extensive management information on patient care and costs, and continuous evaluation of coding practices. Hospitals have an incentive to diagnose patients into highly paid case categories and code medical records to increase payments. Medical experts assigned by the social security fund will carry out regular investigations  in those institutions who are cost outliers.

As it is, the new system does not provide incentives for quality, on the contrary it might create well-known undesirable effects (adverse selection, shorter stays, higher readmission rates, etc.). However in France, the introduction of the case-mix payment system seems to have increased the general awareness of quality of care issues. The Ministry of Health, in collaboration with the High health authority, launched in 2004 a project for collecting comparable data on quality of care in hospitals. The close monitoring of quality of care might counterbalance the perverse incentives and might help to improve quality.

Equity in this reform is defined as "equitable treatment of public and private providers". Public providers express their doubts about the new system's capacity to distribute resources according to needs. Also the system may promote discrimination against patients based on their pathologies and severity, if the rates are not adequately adjusted.

Impact of this policy

Quality of Health Care Services	marginal		fundamental
Level of Equity	system less equitable		system more equitable
Cost Efficiency	very low		very high

Too early to make a judgement.

References

Sources of Information

"Hopital 2007" plan announced by Ministry of Health:

www.sante.gouv.fr/htm/dossiers/hopital2007/

La tafification à l'activité :

http://www.sante.gouv.fr/htm/dossiers/t2a/accueil.htm

http://www.ameli.fr/dl/Infos_TAA_0403.pdf

http://www.urml-idf.org/urml/T2A/T2A0408.pdf

Author/s and/or contributors to this survey

Zeynep Or

Suggested citation for this online article

Zeynep Or. "Hospital payment reform". Health Policy Monitor, March 2005. Available at http://www.hpm.org/survey/fr/a5/4