Do reimbursement schemes succeed in incentivizing hospitals to provide better quality care?

Arun Joseph VargheseArun Joseph Varghese on December 23, 2015

The article is an attempt to look at popular reimbursement schemes and explore their effect on incentivizing Healthcare Providers to improve the quality of care.

  • Fee for Service (FFS): The FFS method is an activity based definition of insurance coverage. Here the payer defines the insurance covered vs. excluded set of services and the sponsor based limits for them, which may then also have co-payments, deductibles and maximum cap based limits for treatment. For example: An insurance policy may have Lab based services which have a percentage based co-payment or a fixed deductible amount collected against each lab test that is billed and all dental services may be excluded.In the FFS method - the policy holder is free to purchase his health insurance policy (until it is provided by the employer) and pay higher premiums for better insurance coverage or pay lower premiums for higher co-payments and lower coverage. The advantage of the Fee for Service based reimbursement is that the provider has a clear visibility of insurance coverage of services. With regards to whether this method incentivizes better quality of care – studies have proven that providers are not incentivized to reduce the patient’s Average Length of Stay and the potential of inflating a bill to add to the hospital’s revenue which leads to overuse / misuse of resources is relatively higher. Payers have hence attempted to move FFS based reimbursements only for Out-Patient treatments and payers have also moved to verifying claims using rules based engines to link the ICD to the services provided to ensure veracity of claims and clinical significance of treatment provided.
  • DRG: The DRG or Diagnosis Related Groups based reimbursement is a statistically derived way of linking the complexity of the diagnosis to the average cost of treating the patient’s ailment. This method is popularly followed in Germany, Singapore, Australia and the Medicare scheme in the US. Here each diagnosis is assigned a cost weight based on complexity of diagnosis. For example – Normal Pregnancy a common reference point is assigned a CW – Cost Weight of 1 and all other cases are given a cost weight in relation to Normal Pregnancy – such as CABG – may have a CW of 4.5 or an appendectomy will have a CW of 0.5. Cost Weights are statistically derived and may run into 4 decimal points and has to be localized based on the varying demographic and prevailing conditions. The Payer and the Provider often negotiate on the acceptable Base Rate based on which the lump-some amount is calculated for each DRG case. The lump-some total is hence the base rate multiplied by the Cost Weight Factor. For example the cost of a Normal Pregnancy may be of Base Rate (say 8500) multiplied by a Cost Weight (1) = 8500. Due to the varying factors, such as clinical condition of the patient during treatment, providers have provisional amounts and define an acceptable Margin Factor and an additional Gap Amount for such cases to cover for deviations or exceptions, which are to be paid additionally by Payers. Some of the advantages of the DRG method is that the hospital is incentivized to reduce the average length of stay of patients (ALOS) and improve quality of treatment to achieve quicker discharges. The hospitals though do complain that cost coverage is not adequate for a co-morbid case and emergency cases. In the Philippines, the Phil-Health Insurance and in Indonesia the BPJS schema, are variations to the DRG based lump-some reimbursement where the medical and surgical cases are linked to a pre-defined Case Rate which is standardized across all types of Healthcare providers in the country. In fact about 70% and upwards of the In-Patient treatment in the Philippines is covered by Phil-Health Insurance.
  • The Capitation Model: famous in the US via the Health Maintenance Organizations, has gained adoption in African countries amongst others. The HMO guarantees that a member has access to certain doctors or hospitals within its network. The HMOs pre-pay the providers within its network a fixed capitation fee on a periodic basis, to cover for the health needs of its members. The pre-paid amount is ascertained based on the expected number of patient visits per month. Some HMOs do additionally incentivize preventive care by creating plans which have lower co-pays for services such as immunization, health checkups, mammograms etc. The capitation model has been known to provide a sense of financial security for providers have a cost containment effect, improve access to care for patients, manage care, drive utilization of services and drive quality amongst providers but recent research shows that the HMO plans have little effect on cost containment in comparison to non-HMO plans. HMOs have been accused of cherry picking is clients and not covering adequately for spiraling administrative costs.
  • Per Diem: The Per Diem model is a type of prospective payment by payers for certain procedures or services on a per day basis. The amount is ascertained using historical prices as the estimator to arrive at an average cost of delivery for a certain health need. Say for example a fractured leg on an average requires a patient to have 3 bed days of stay costing 600$ and so the per diem limit is set as 200$ by the payer. This fixed cost model has also evolved to contain costs and improve quality across providers. The common resistance from providers is that their case-mix shows that they deal with more complex procedures which on averaging - leads for them to make losses on such cases.
  • Discounted Charges : The Medicaid Program in the US and corporate companies often work on this discounted prospective model where the fees/costs associated with the healthcare need is discounted and the negotiations completed before-hand between payer and provider. The agreement may entail agreed discounted rates for the employees and family members. The advantage for providers with this model is that it ensures a steady flow of patients but has little cost/quality impact if combined with an FFS reimbursement as against the discounted model against a per diem model as is the case with Medicaid.
  • Sponsor Coverage Limits: The model commonly seen in certain countries is a treatment limit based on the insurance premium paid by the patient which guarantees an annual cover for treatment of a host of procedures and services except on pre-existing conditions. This model is too open-ended for a provider to be incentivized on reducing costs and leads to overutilization of services, unnecessary interventions, and can lead to excess claims by providers.
Arun Joseph Varghese

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Arun Varghese
Passionately solving healthcare problems with IT solutions for over a decade is the Product Owner for Insta HMS by Practo.


December 23, 2015