1. Case-Based Hospital Payment Systems: Key Aspects of Design and Implementation
Cheryl Cashin - USAID ZdravPlus Project/Abt Associates

2. Why are Hospital Payment Systems Important?
The hospital inpatient sector almost always consumes the greatest share of health care resources
Therefore, the way hospitals are paid can have a particularly strong influence on the performance of the health care system as a whole
There are alternative methods for paying hospitals, all of which have a variety of strengths and weaknesses
Some hospital payment systems may be appropriate at certain times in a country;
Most appropriate payment system may change over time
Often most effective to use payment methods in combination

3. Technical Concepts

4. Definition of Case-Based Payment
The health purchaser pays all hospitals in the payment system a fixed rate for each case that falls into one of a set of defined categories.
Payment rates can be defined as
the global average cost for all hospital cases
the average cost per case in each hospital department
or the average cost per case in the patient’s diagnosis category.
The fixed payment rates are set for a group of hospitals, rather than for a single hospital
Implementing a new payment system for a single hospital will not achieve the goals of a new payment system.

5. Incentives
Economic signals that direct individuals and organizations toward self-interested behavior.
Health providers respond to economic signals in payment systems to maximize the positive—and minimize the negative—effects on their income and other interests.

6. What are the Incentives of Case-Based Payment?
Reduce cost/improve efficiency of inputs, for example:
Reduce total inputs per case
Reduce length of stay
Employ more nurses and fewer physicians
Shift rehabilitation care to outpatient setting
Increase productivity--total # of cases (including unnecessary hospitalizations)
May have positive or negative consequences for patients, purchaser, and the system

7. Potential Goals of a Case-Based Hospital Payment System
Reorient health financing toward reimbursing services for the population rather than infrastructure (buildings)
Create incentives for hospitals to deliver higher quality services using fewer or lower cost inputs
Introduce hospital competition and choice for patients or otherwise increase the responsiveness of the health system
Allow government funds to be used to purchase services from private hospitals
Improve the efficiency of resource allocation across hospitals, and between the hospital sector and other levels of care
Drive restructuring, and re-profile or close inefficient hospitals/departments
Improve the equity of health financing
Generate information for better management of the health sector
Increase hospital management autonomy (decentralization of health facility-level management)

8. Why Case-Based Payment?
Case-based hospital payment systems have been seen as a valuable tool in a wide variety of contexts for:
Reorienting provider payment from input-based budgets to paying for outputs, and
As a way to introduce efficiency incentives and competition into the hospital sector.

9. Methodological Issues

10. Components of a Per Capita Payment System
Minimum components:
the set of parameters for calculating the payment rates for each type of case; and
an administration system (information and billing system)
Case-based payment systems using diagnosis-based case groups also require an information system that computerizes the recording of cases by the hospitals and the grouping of cases into payment categories.

11. Payment Formula
Where,
Payment per casei = price paid by purchaser for cases in case group i
BR = base rate, or global average cost per case
CGWi = case group weight for case group i
Oh = other adjustors for hospital h

12. Step 1: Define Case Groups
Type of Case Grouping
Data Requirements
Data Sources
No case grouping
Average cost per hospital case
Historical hospital budgets; statistical data; other hospital expenditure and utilization data
Department case grouping
Department average cost per bed-day; department lengths of stay
Hospital budgets and cost-accounting analysis; statistical data; other hospital expenditure and utilization data
Diagnosis-based case grouping
Department average cost per bed-day, department lengths of stay, and other characteristics of the hospital or case
Hospital budgets and cost-accounting statistical data; individual data on age, sex, ICD-9 or ICD-10 code for primary diagnosis, length of stay, surgery, and other characteristics of the case (such as intensive care)

13. Diagnosis-based Case Grouping
Case groups bring together cases with both similar clinical characteristics and resource requirements for diagnosis and treatment.
A combination of statistical analysis and expert judgment
Iterations of:
Combining ICD codes into groups
Determining the cost distribution within the group
Recombining ICD codes to improve the distribution (come close to a relatively tight normal distribution)

14. Steps in Diagnosis-based Case Grouping
Step 1. Determine the structure of case grouping
Step 1.1 Create major diagnostic categories
Step 1.2 Group cases into medical/surgical cases
Step 1.3 Group cases into patient age groups
Step 2. Determine the cost distribution across ICD codes
Step 2.1 Determine the average cost per case
Step 2.2 Aggregate cases by ICD-10 code
Step 2.3 Remove outliers
Step 3. Merge clinical and economic criteria to determine case groups
Step 3.1 Create diagnosis-based case groups
Step 3.2 Calculate average cost per case in each case group

15. Step 2. Cost-Accounting Analysis
Used to determine unit cost per case
Allocate the full costs, direct and indirect, from administrative and ancillary departments to clinical departments estimate the full unit cost of a case in that department.

16. Step 3. Calculate Case Group Weights
Case group weights reflect the average cost per case in a case group (i) relative to the global average cost per case.
For example, a case group weight of 1.2 indicates that these cases use on average 20% more resources to diagnose and treat than the average.

17. Step 4. Calculate the Base Rate
The base rate is the global average cost per hospital case--computed from the hospital pool
A major policy lever in a case-based hospital payment system:
Influences the allocation of health care resources between the hospital sector and other parts of the health care system,
Influences the allocation of resources across hospitals and regions
Can be a tool to promote equity– e.g. increase resources in areas that have been historically underfinanced

18. Setting the Hospital Pool
The amount of funds available to the purchaser in one year to pay for hospital services for all providers included in the payment system;
Excludes direct out-of-pocket payments;
May include funds for capital expenditures or only operational expenditures.
The hospital pool may be set by:
Bottom-up costing: but maintains old cost structure; exact specification of services and calculation of costs is difficult;
Top-down allocation: a fixed % of the health budget is allocated to hospital sector; % is a policy tool; or
Combination: base pool on estimated resource needs and also fix % allocation as a policy tool

19. Step 5. Information and Billing Systems
Information and billing systems are required for hospitals to record the information about each case to determine the payment rate, and to document the billing and payment process
The two main components are established at both the provider and the purchaser level:
Hospital case database, including basic discharge information about each hospital case at each hospital included in the payment system; and
Financial database, including cost accounting and expenditure information.

20. Step 6. Refine Case Grouping
Routine revision and refinement of the case groups and weights to incorporate new data from the case database into the cost per case estimates, case groups, and case group weights.
As more data become available from the information system, case groups can be refined by:
Increasing the number of case groups;
Increasing the number and range of clinical characteristics used to group the cases (e.g add comorbidities or severity measures);
Developing supplementary payment mechanisms for outlier cases.

21. Practical Applications and
Experiences

22. Health Policy Context for a New Hospital Payment System
What is the system, organizational, and policy context of health care services?
What are the goals of the payment system?
What conditions must be met and what steps are required to ensure that the goals will be achieved?
What changes can be expected in the hospital sector and other parts of the health care system and community after the case-based payment system is introduced?

23. Implementation Issues
Transition to a case-based payment system:
Transition from budget through other output-oriented payment system (e.g. per diem)
Incremental inclusion of hospitals
Incremental inclusion of reimbursed costs (e.g. start with variable costs)
Incremental inclusion of types of cases
Incremental movement from hospital-specific to system-wide base rate

24. Implementation Issues, cont.
Measures to counteract adverse incentives (increasing admissions, avoiding costly cases, upcoding, etc.):
Reduction or denial of reimbursement for hospital readmissions
Minimum lengths of stay
Purchaser monitoring /controlling volume of admissions
Medical audit or other review processes

25. Case Study: Case-based Hospital Payment as the Trigger for Broad Health Reform in Kyrgyzstan
The mandatory health insurance fund (MHIF) implemented a new case-based hospital payment system with 13 hospitals in 1997;
The MHIF leveraged its small amount of money (about 10% of total health funding) to drive broader health reform;
The new case-based hospital payment system only reimbursed variable costs directly related to patient care, while the budget still paid for fixed costs;

26. Case Study: Case-based Hospital Payment as the Trigger for Broad Health Reform in Kyrgyzstan
Hospitals used the incremental funds to purchase drugs, supplies, food, and to fund performance-based staff bonuses.
Resulted in support for health insurance from the population (copayments for drugs reduced), and providers (salaries supplemented with bonus payments).

27. Outcomes of Case-Based Hospital Payment in Kyrgyzstan
Streamlining of the delivery system--hospital capacity reduced by at least 40% by 2004;
Improved allocative efficiency of the health system--share of health care expenditures to PHC more than doubled from 15 to 38% between 2001 and 2007;
Increased technical efficiency of hospitals--share of health expenditures allocated to direct patient care increased from 16to 33% between 2001 and 2007;
Improved service delivery and quality improvement--hospitals not reimbursed by the health insurance system unless accredited.