PROVIDER PAYMENT
MECHANISMS
Dr Edward Rukwaro
Group CEO
Mediheal Group of Hospitals
SHOPS is funded by the U.S. Agency for International Development.
Abt Associates leads the project in collaboration with
Banyan Global
Jhpiego
Marie Stopes International
Monitor Group
O’Hanlon Health Consulting
Health Financing challenges in Kenya
• Low efficiency
• Inequity
• Poor Quality
• Poor Access
• Low Risk Pooling
• High OOP
• Poor financial and management systems
• Poor Regulatory environment
Types of Provider Payment
TYPES OF PROVIDER
PAYMENT
Types of provider payment methods
• Prospective vs. retrospective:
• Prospective - rate for a defined set of services is set
before treatment takes place
• Retrospective: rate determined during or after the
service has been given
• Aggregate vs. disaggregated units
• Aggregate unit payment – payment is made for a set
of services
• Disaggregated units: payment is made for specific
items such as consultation, X-rays, drugs. typical of
fee-for-service.
Prospective payment methods
• fee is set before the procedure, e.g. case –
based and capitation methods
• Healthcare provider carries some degree of
financial risk. If costs turn out to be higher than
anticipated, provider bears the consequence.
• there is an incentive for efficiency to reduce costs
on the part of the provider but quality may be
compromised
Retrospective payment methods
• financial risk rests with the payor
• No incentive for provider to reduce costs
• Tends to be a cost enhancer and may promote
over servicing
Common provider payment mechanisms
• To individuals: • To Facilities
• Budget • Budget
• Capitation • Capitation
• Fee-for-Service • Diagnosis Related
• Pay for Performance Groups
• Salary • Fee-for-Service
• Pay for Performance
• Salary
Budget
• Commonly used in the public sector
• Could be prospective of retrospective
• Line item budget – allocated to specific functions
such as food, salaries, medicines. Limits
flexibility in resource use
• Global budget; advance payment to a health
facility to cover a specified period. Allows
flexibility in resource use
• Tendency to spend entire budget to ensure
continued level of support
Capitation
• A prospective payment
• fixed amount paid based on number of patients enrolled
• Controls costs by transferring risk to the health care
provider
• Low administrative burden
• method is favourable to the provider, because it guarantees
revenue over a defined period.
• Management systems required to register each beneficiary
with one provider and to monitor utilisation to curb under
servicing
• Has more incentive to stimulate efficiency
• Riskier populations may be excluded – the aged and those
with chronic illnesses
• Quality may be sacrificed to contain costs
Diagnosis Related Groups
• Most frequently applied to in patients
• Prospective system
• the provider is paid a fixed and predetermined
amount for treating a case rather than for each
treatment,
• Uses a patient classification system such as
diagnosis related groups (DRGs)
• Links payment to complexity of case and therefore
may be complicated
• Reliable data and information recording system
required;
• The development of a case-based system of
payment is a complex and time consuming task
Fee-for-Service
• Payment is per unit of service – provider paid
according to number of service items delivered.
• Financial risk rests with payor, low risk for provider
• May encourage over servicing and unnecessary
interventions
• has very high administrative costs for both the
provider and payor.
• For the providers, billing procedures are costly.
• For the insurer, the cost of processing claims is high.
• The payor/insurer must establish expensive
monitoring procedures to minimize false claims.
Pay for Performance
• Administrative burden for providers and insurers
• P4P programs can be costly and require
substantial additional investment in information-
technology to monitor performance
• Providers may Increase number of services that
lead to improved performance indicator
• Gaining acceptance from providers
Per Diem
• Mostly for in patient services
• Pays daily aggregate fee for all expenses
• Low financial risk to provider, high risk on payor
• May encourage increase in the number of
admissions and longer lengths of stay.
• Case coordination required to monitor length of
stay
Salary
• Objective is to make doctors focus on core business of
service provision
• Salaries often lag behind especially in the public sector
• Consequently low morale, frequent industrial actions,
low productivity, high turnover of professionals
→reduced quality of service
• NGOs tend to offer more attractive packages
• Tendency for medical personnel to move from public
institutions to donor funded facilities
Incentives in Different PPMs – Primary
Health Facilities
Health Payment Financial incentive set to
facility method provider
Primary Capitation Treat patient within budget, or in
health care adjusted by worst case, provide sub-standard
age and care and exclude high-risk patients;
gender Refer patients to specialist and
hospitals
Fee-for-service Increase number of services per
patient
line item Increase input factors (bed, staff, etc)
budget and use full budget
P4P Increase number of services that
lead to improved performance
indicator
Capitation – Treat within budget and increase
Fee-for-service number of fee-based services
mix
Incentives
Payment Type Incentive Effects
Incentive Incentive to
Incentive Incentive to Controls cost
to shift patients'
to increase target the of doctor
decrease costs to
activity poor employment
activity others
Fee-for-service Yes No No May be No
Salary No Yes Yes No No
Capitation No Yes Yes No Yes
Diagnosis Related
Yes No No May be No
Group
Pay for Performance No Yes Yes Yes No
Budget No Yes Yes No No
PPMs- Policy Trade-Offs
Greater Greater Patient Higher Quality High Cost
Efficiency Risk Selection Escalation
Capitation Capitation DRG FFS
DRG DRG FFS Per Diem
Salary, Per Diem Per Diem Per Diem DRG
FFS FFS, Salary Capitation Capitation
Lower Efficiency Less Patient Lower Quality Cost Control
Risk Selection
Need for Balance
• Efficient provider
payment systems
allow providers to earn
a reasonable income,
but maintain good
quality of care while
preventing waste and
unnecessary service
provision.
• This is a difficult
balance to achieve.
Conclusion
• A well designed PPM should be able to meet thee three objectives of
quality, efficiency and Accessibility
• Design of PPM must also take into consideration the management
capacity and systems of both the financier and health providers
• Each payment method has different impact on efficiency, quality and
access
• Complex payment methods require more financial and clinical
information and therefore have higher administrative costs
• Competition among providers tends to promote quality and consumer
satisfaction
• No single provider payment method provides all the right incentives.;
a combination of payment methods may be necessary
“Ignorance on fire is better than
knowledge on ice”
Burke Hedges(You Inc.)
“IGNORANCE ON FIRE IS BETTER
THAN KNOWLEDGE ON ICE”
