317_L33, April 4, 2008, J. Schaafsma 1 Review of the Last Lecture Finished our discussion of models of not-for-profit acute care hospitals began our discussion of the last topic: four different hospital reimbursement systems and their incentive effects for technical and allocative efficiency Have discussed 1) prospective reimbursement, 2) reimbursement by unit of service Have almost finished our discussion of 3) reimbursement by episode of care (also called payment by DRG) finish our discussion of DRG and then discuss 4) capitation payment

317_L33, April 4, 2008, J. Schaafsma 2 3. Payment by Episode of Care: (Review) also called payment by diagnostic related grouping (DRG) hospital is paid a fixed amount for treating a patient with a specific problem  case based payment  so much per appendectomy case, tonsillectomy case, etc. payment reflects average cost across hospitals of treating such a case. have discussed its strengths and weaknesses in the last lecture need to make two more points

317_L33, April 4, 2008, J. Schaafsma 3 Payment by Episode of Care: Hospital Admissions no revenue if no hospital admissions  incentive to admit “cream skimming”  incentive to admit “cheap” cases (earn a surplus) and discourage admission of “expensive” cases (where a loss might be incurred) ///

317_L33, April 4, 2008, J. Schaafsma 4 Fourth Payment System: Capitation Payment hospital is paid $x per person in its catchment area regardless of whether the person uses the hospital or not. the $x could vary by age and sex same per capita payment (by age/sex) for all hospitals surplus may be retained

317_L33, April 4, 2008, J. Schaafsma 5 Capitation Payment: Incentives incentive to at least break even assume hospital wants to earn a surplus, then: i) incentive for technical efficiency  revenue is fixed by size/demographics of population  reduce costs  generate a surplus ii) incentive to control unnecessary hospital use  control admissions and service intensity. if the hospital is not interested in earning a surplus or maximizing output  it will just manage its affairs to break even if the hospital wants to max output  it will break even  technical efficiency, but may not have allocative efficiency  may admit patients who could be cared for at home and/or over service ///

317_L33, April 4, 2008, J. Schaafsma 6 Capitation and Prospective Reimbursement these two systems are quite similar  both have a fixed budget constraint for the year and thus the same potential incentive effects capitation reimbursement facilitates funding on the basis of comparisons across hospitals, i.e., hospitals serving populations with the same demographics should get the same funding  can impose efficiencies across hospitals Prospective reimbursement is simply an annual update of a hospital’s allocation based on past expenditures  less likely to impose efficiencies (unless the budget is reduced) ///

317_L33, April 4, 2008, J. Schaafsma 7 Incentive Reimbursement and Incomplete Vertical Integration two sets of vertical layers in HC 1.Ministry of Health, Hospital management, Drs 2.Acute care, chronic care, home care, preventive care. Neither set of layers is well integrated In terms of the 1 st set, MoH aims the financial incentives (if any) at hospital management, yet Drs have a major influence on resource use decisions  incentives should be aimed at Drs. How? => MoH could pay Drs a fee per episode and let the hospital charge Drs a fee per unit of service for the hospital services. ///

317_L33, April 4, 2008, J. Schaafsma 8 Lack of Vertical Integration by Type of Care until recently, different levels of care were offered by different organizations who had their own budgets no single organization with a single budget was determining the most cost-effective setting to provide the care a person needs in general  too many people in an acute care hospital who could be cared for in other settings  but not enough capacity in alternative settings. by integrating different levels of care under one authority  the single authority will have an incentive to shift money from e.g., acute care to home care if this will effect savings  this is one mandate for regional health councils. ///

317_L33, April 4, 2008, J. Schaafsma 9 Structure of the Final Exam 2 hour comprehensive final examination: i) you will be asked to do any 5 of 6 short essay questions (18 minutes per question) at least one, and possibly two of these questions will be drawn from sections I – IV on the course outline at least one, and possibly two of these questions will be drawn from sections V on the course outline at least two of these questions will be drawn from topics VI & VII on the course outline ii) You will also be asked to do 1 of 2 long essay questions (30 minutes) based on any section of the course outline.

317_L33, April 4, 2008, J. Schaafsma 10 Study Suggestions The exam is based on the lecture material only; calculators are not permitted As you study, condense your lecture notes and the power point slides into a 5 – 10 page outline of the material (headings/sub-headings/ points) test yourself using the outline have lots of scrap paper and a pencil on hand to practice drawing diagrams. Be sure you can explain the economics behind the diagrams and are able to use the diagrams to derive/explain results Be sure you can define and explain concepts/theories be able to compare/contrast alternative theories, policies, methods understand advantages/disadvantages of methods/policies

317_L33, April 4, 2008, J. Schaafsma 11 Exam Period Office Hours J. Schaafsma BEC 368 Wednesday: April 9, 2:00 – 4:00 pm Friday: April 11, 10:00 – 12:00 noon Monday: April 14, 2:00 – 4:00 pm Tuesday: April 15, 10:00 – 12:00 noon Wednesday: April 16, 10:00 – 12:00 noon & 2:00 – 4:00 pm Or by appointment