Incentives For Cost Containment Research Articles

Limited Consequences of a Transition From Activity-Based Financing to Budgeting: Four Reasons Why According to Swedish Hospital Managers.

Activity-based financing (ABF) and global budgeting are two common reimbursement models in hospital care that embody different incentives for cost containment and quality. The purpose of this study was to explore and describe perceptions from the provider perspective about how and why replacing variable ABF by global budgets affects daily operations and provided services. The study setting is a large Swedish county council that went from traditional budgeting to an ABF system and then back again in the period 2005-2012. Based on semistructured interviews with midlevel managers and analysis of administrative data, we conclude that the transition back from ABF to budgeting has had limited consequences and suggest 4 reasons why: (1) Midlevel managers dampen effects of changes in the external control; (2) the actual design of the different reimbursement models differed from the textbook design; (3) the purchasing body’s use of other management controls did not change; (4) incentives bypassing the purchasing body’s controls dampened the consequences. The study highlights the challenges associated with improvement strategies that rely exclusively on budget system changes within traditional tax-funded and politically managed health care systems.

A method to simulate incentives for cost containment under various cost sharing designs: an application to a first-euro deductible and a doughnut hole

Many health insurance schemes include deductibles to provide consumers with cost containment incentives (CCI) and to counteract moral hazard. Policymakers are faced with choices on the implementation of a specific cost sharing design. One of the guiding principles in this decision process could be which design leads to the strongest CCI. Despite the vast amount of literature on the effects of cost sharing, the relative effects of specific cost sharing designs—e.g., a traditional deductible versus a doughnut hole—will mostly be absent for a certain context. This papers aims at developing a simulation model to approximate the relative effects of different deductible modalities on the CCI. We argue that the CCI depends on the probability that healthcare expenses end up in the deductible range and the expected healthcare expenses given that they end up in the deductible range. Our empirical application shows that different deductible modalities result in different CCIs and that the CCI under a certain modality differs across risk-groups.

Payment schemes and cost efficiency: evidence from Swiss public hospitals.

This paper aims at analysing the impact of prospective payment schemes on cost efficiency of acute care hospitals in Switzerland. We study a panel of 121 public hospitals subject to one of four payment schemes. While several hospitals are still reimbursed on a per diem basis for the treatment of patients, most face flat per-case rates-or mixed schemes, which combine both elements of reimbursement. Thus, unlike previous studies, we are able to simultaneously analyse and isolate the cost-efficiency effects of different payment schemes. By means of stochastic frontier analysis, we first estimate a hospital cost frontier. Using the two-stage approach proposed by Battese and Coelli (Empir Econ 20:325-332, 1995), we then analyse the impact of these payment schemes on the cost efficiency of hospitals. Controlling for hospital characteristics, local market conditions in the 26 Swiss states (cantons), and a time trend, we show that, compared to per diem, hospitals which are reimbursed by flat payment schemes perform better in terms of cost efficiency. Our results suggest that mixed schemes create incentives for cost containment as well, although to a lesser extent. In addition, our findings indicate that cost-efficient hospitals are primarily located in cantons with competitive markets, as measured by the Herfindahl-Hirschman index in inpatient care. Furthermore, our econometric model shows that we obtain biased estimates from frontier analysis if we do not account for heteroscedasticity in the inefficiency term.

Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers

Health Insurance Marketplaces established by the Affordable Care Act implement reinsurance and risk corridors. Reinsurance limits insurer costs associated with specific individuals, while risk corridors protect against aggregate losses. Both tighten the insurer's distribution of expected costs. This paper compares the economic costs and consequences of reinsurance and risk corridors. We simulate the insurer's cost distribution under reinsurance and risk corridors using data for a group of individuals likely to enroll in Marketplace plans from the Medical Expenditure Panel Survey. We compare reinsurance and risk corridors in terms of risk reduction and incentives for cost containment. We find that reinsurance and one-sided risk corridors achieve comparable levels of risk reduction for a given level of incentives. We also find that the policies being implemented in the Marketplaces (a mix of reinsurance and two-sided risk corridor policies) substantially limit insurer risk but perform similarly to a simpler stand-alone reinsurance policy.

Quality competition with profit constraints

Firms in markets such as health care and education are often profit constrained due to regulation or their non-profit status, and they are often viewed as being altruistic towards consumers. We use a spatial competition framework to study incentives for cost containment and quality provision by altruistic firms facing profit constraints. If prices are regulated, profit constraints lead to lower cost containment efforts, but higher quality if and only if firms are sufficiently altruistic. Under price competition, profit constraints reduce quality and cost containment efforts, but lead to lower prices if and only if firms are sufficiently altruistic. Profit constrained firms’ cost containment efforts are below the first-best, while their quality might be too high or too low. If prices are regulated, profit constraints can improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.

Risk-Adjusting the Doughnut Hole to Improve Efficiency and Equity

An important goal of consumer cost-sharing in health insurance is to increase incentives for cost containment. A relatively new cost-sharing phenomenon is the "doughnut hole": a gap in coverage starting at a predefined level of medical expenses. An important question is where to locate the starting point to achieve the strongest incentives for cost containment. We argue that the answer depends on an individual's health status. Using data from a Dutch insurer, this paper illustrates that using a risk-adjusted starting point results in both stronger incentives for cost containment and more equity than a uniform starting point.

Does Public or Not-for-Profit Status Affect the Earnings of Hospital Workers?

This paper examines the earnings differentials among hospital workers in the public, private nonprofit, and private for-profit sectors. Utilizing data from the 1995 through 2007 Current Population Surveys, unadjusted earnings are highest in the private nonprofit sector and lowest in private for-profit firms. Once measurable characteristics are accounted for, health practitioners in for-profit and nonprofit hospitals earn similar wages while public sector workers earn small but significant wage penalties. Nonprofit hospitals tend to attract workers with higher levels of skill as measured by schooling and potential experience. This could be explained in part by worker sorting and lower cost containment incentives in nonprofit hospitals. Wage change analysis using pooled 2-year panels constructed from the CPS indicate no significant differences in earnings between the three sectors of employment. Whatever the role of the sector of employment on the overall earnings of hospital workers, there is sufficient worker mobility within the industry to largely eliminate systematic wage differences across type of hospital.

The impact of Medicare's Prospective Payment System on staffing of long-term acute care hospitals

Long-term acute care hospitals (LTACHs) treat patients with complex medical conditions requiring hospital care for extended periods of time. In the last decade, Medicare saw spiraling costs for post-acute care settings. The Balanced Budget Act mandated the use of Prospective Payment System (PPS) for all post-acute care settings including LTACHs. Medicare shifted to PPS for LTACHs in October 2002. This study analyzes the early effect of Medicare's PPS on the staffing intensity of LTACHs. The study uses panel data of measures of hospital and market characteristics in years 2001 through 2004. The impact of the payment mechanism, market, and organizational variables on the staffing intensity of LTACHs is evaluated using fixed-effects (within-groups) regression analysis. The fixed-effects regression models found that Medicare's PPS was associated with higher staffing intensity of the LTACHs in years 2003 and 2004. Market-level per capita income was significantly positively associated with staffing intensity. No secular trend in staffing intensity was found. The concern that the cost containment incentives of PPS would result in lowered staffing levels of LTACHs was not borne out by this study. Further follow-up is required to assess in the longer term the effects of PPS on staffing and quality of care in LTACHs.

Decentralized responsibility for costs of outpatient prescription pharmaceuticals in Sweden: Assessment of models for decentralized financing of subsidies from a management perspective

In this study, models for decentralization of responsibility for costs of subsidised outpatient prescription pharmaceuticals within the county councils in Sweden were studied. The aims of the decentralization were to cut the escalating costs associated with risk sharing mechanisms on a national level and to integrate utilization of drugs into the priority process in health care. History of development and the characteristics of the solutions on county level were identified, described and analysed from taped interviews with relevant persons in central management positions in the selected counties. Information was supplemented from documentation. Two main models were found, a population based model and a prescriber based. In the population based model, family medicine in primary care was responsible for subsidies of drugs classified as “basic” (80%) regardless of prescriber. In this model, hospital departments were responsible for the “special” drugs (20%) regardless of prescriber. In the prescriber based model each provider was responsible for costs of its own prescribing. We found that the prescriber based model was chosen for the strong incentives for cost containment, while the population based model was expected to focus more on service to patients. This reform was based on the assumption that incentives for cost containment on an organisational level are effective. Experiences from other reforms in health care support this hypothesis. This means that there is a risk that cost containment jeopardises medical decisions on patient level.

Patients' attitudes toward cost control bonuses for managed care physicians.

Physicians' cost containment incentives may create conflicts of interest. To understand how patients view these incentives, we interviewed 1,050 patients regarding a 10 percent cost control bonus and a combined cost control/quality bonus. Seventy-three percent said that the cost control bonus was a bad idea; 49 percent viewed the combined bonus more favorably than the cost control bonus; and 91 percent favored disclosure of bonuses. We conclude that patients find bonuses worrisome and favor their disclosure. A quality component reassures some, but not all, patients. Initiating a dialogue with patients about practicing medicine in an era of limited resources may help health plans and physicians to address patients' concerns.

Risk adjustment of capitation payments to behavioral health care carve-outs: how well do existing methodologies account for psychiatric disability?

This study used 1994-1995 administrative data from a large public employer to examine the viability of commercial risk adjustment systems for setting capitation payments to competing behavioral health care "carve-outs". The ability of Hierarchical Condition Categories and Adjusted Diagnostic Groups to predict psychiatric expenditures was improved by controlling separately for psychiatric disability. However, even the best models underpredicted expenditures of patients with psychiatric disability by 15%. Relative to full capitation, "mixed" payment systems and soft capitation reduce the ability of carve-outs to earn disproportionate profits by enrolling healthy patients and avoiding sick ones, yet also diminish incentives for cost containment.

Using outcomes to make inferences about nursing home quality.

Recent concerns about containing the growth of public expenditures on nursing home care and the development of prospective and casemix reimbursement systems with incentives for cost containment have increased the importance of monitoring quality in nursing homes. The current view is that quality assurance systems should include more outcome measures to improve quality. This article discusses why it is difficult to develop facility-level outcome measures that can be used to evaluate and compare the quality of care of nursing homes. The article places the current interest in outcomes measures in its historical policy context and reviews important conceptual and methodological issues associated with outcome-based quality assessment. The authors discuss the difficulty in isolating the facility effect when studying nursing home outcomes and implications of using different estimation approaches. In conclusion, they discuss the need to integrate research with outcome-based quality assurance systems to allow ongoing evaluation and quality improvement.

Health financing policy formulation in the Eastern Caribbean.

Stakeholders formulating policies on national health insurance (NHI) in the Eastern Caribbean have circled the abstract concept called NHI like the proverbial blind men explaining the elephant. Definitions of NHI have shifted depending on their perspectives and philosophical leanings, their understanding of the issues, and their degree of influence on the process. Based on NHI feasibility studies, market research, and stakeholder analysis conducted in five countries, this article analyses the policy formulation stage of NHI development in these tiny countries. Given the level of economic development and the existing administrative capacity of the governments, this 'phase one' NHI could be a pragmatic first step in introducing a health insurance component into the social security systems of the countries, and gradually reforming other aspects of the health sector. The article is structured around key questions which help to define the positions and relationships of key stakeholders, and then evaluate NHI plans in terms of economic viability, equity, administrative feasibility and efficiency, cost containment incentives, and political palatability. These are the elements that--in combination with economic and political context--will determine the success or failure of NHI in the Eastern Caribbean.

Health financing policy formulation in the Eastern Caribbean

Stakeholders formulating policies on national health insurance (NHI) in the Eastern Caribbean have circled the abstract concept called NHI like the proverbial blind men explaining the elephant. Definitions of NHI have shifted depending on their perspectives and philosophical leanings, their understanding of the issues, and their degree of influence on the process. Based on NHI feasibility studies, market research, and stakeholder analysis conducted in five countries, this article analyses the policy formulation stage of NHI development in these tiny countries. Given the level of economic development and the existing administrative capacity of the governments, this ‘phase one’ NHI could be a pragmatic first step in introducing a health insurance component into the social security systems of the countries, and gradually reforming other aspects of the health sector. The article is structured around key questions which help to define the positions and relationships of key stakeholders, and then evaluate NHI plans in terms of economic viability, equity, administrative feasibility and efficiency, cost containment incentives, and political palatability. These are the elements that—in combination with economic and political context—will determine the success or failure of NHI in the Eastern Caribbean. © 1998 John Wiley & Sons, Ltd.

Some economics of mental health 'carve-outs'.

We discuss the rationale for benefit carve-out contracts in general and for mental health and substance abuse in particular. We focus on the control of adverse selection as a principal explanation and find that this is consistent with the wide-spread use of sole-source contracting with periodic rebidding. We also find that some degree of risk sharing is common; we interpret this as a method of balancing cost-containment incentives with incentives to maintain access and quality on unmeasured dimensions.

Profit Maximizing Cost Allocation for Firms Using Cost-Based Pricing

This work develops a profit maximizing cost allocation scheme for firms that allocate all costs to their various outputs and then use these costs to set prices, a process known as fully-distributed cost-based pricing. If the costs incurred by the firm are not easily traced to a particular output (for example, the electric bill for a shared manufacturing plant), the costs must be allocated. The demand for a given output is assumed to be a function of the price. Hence, the cost allocation scheme that is selected will affect both the price and the demand for the output. The allocation of common costs that maximizes the firm's overall profit under these conditions is identified. Frequently, the profit maximizing allocation allocates none of the untraceable common costs to one or more of the outputs. This allocation scheme stands in contrast to common practices of sharing costs equally or proportionally across outputs. Examples explore the implications of such a profit maximizing cost allocation on prices and demand in four scenarios: i) no constraints, ii) constraints on maximum allowable prices, iii) a change in market size, and iv) cost containment incentives.

Proposals to control high-cost hospital medical staffs.

Several health care reform bills would limit Medicare payments to high-cost medical staffs, that is, physicians in hospitals with a high volume of physician services per admission. In a given year, Medicare's payment to the physicians on each hospital's medical staff could not collectively exceed a limit defined as a certain percentage above the national median. Limits of various forms are used in other parts of the Medicare program. This policy would combine cost containment incentives with a clear organizational structure. In addition, medical staffs could be provided with detailed information on their practice styles.

Medicare Home Health Reimbursement Alternatives

This paper presents a conceptual analysis of access, quality, and cost containment incentives created by several current and potential Medicare reimbursement methodologies. The alternatives examined are methods used by health maintenance organizations (HMOs) and three options receiving national policy consideration: prospective per-visit and per-episode payment, and "bundling." The analysis found better incentives (from a policy perspective) for HMOs with integral home health units than for HMOs using outside contractors. Of the other options, per-episode payment appeared most promising, but requires accurate case mix adjustments. All approaches also require quality assurance tailored to reimbursement incentives. Topics for further research and demonstrations are suggested.

The Defensive Effect of Medical Practice Policies in Malpractice Litigation

According to the prevailing discourse in health policy circles, America's medical system is in the grips of two crises: one of health care spending and one of medical malpractice liability. Although this crisis mentality may result in part from uncritical acceptance of interest group dogma, to the extent that a crisis is in fact widely perceived, it has the quality of a selffulfilling prophesy: if doctors believe, rightly or wrongly, that malpractice suits are out of control, they will practice more defensively, which will further fuel rampant health care spending.' Moreover, malpractice law may stand as a principal force in opposition to cost containment reforms: if the inflated practice norms of the past are enshrined in malpractice law precedents, then any physician who responds to cost containment incentives by treating patients less aggressively may be exposing herself to certain malpractice liability.2

Capitation financing of public mental health services for the chronically mentally ill

In the 30 years since deinstitutionalization began the public mental health system has experimented with a variety of financing and management models in the delivery of care to the chronically mentally ill. Currently, capitation methods of payment for public mental health services to the chronically mentally ill are being tested as an alternative to fee-for-service reimbursement. Proponents suggest that capitation will increase service flexibility and produce a variety of better coordinated, more cost efficient services. Opponents believe that capitation will result in reduced care given the absence of treatment protocols and the financial incentives for cost containment. This paper discussed the impact of financing mechanisms and organizational structure on the delivery of mental health care for the chronically mentally ill, provides a review of the pertinent literature, and describes demonstration projects currently underway. Questions are raised as to the potential impact of capitation on the mental health system.