Proposed new payment system for hospitals

A prospective case-based payment system (Diagnosis Related Group system) will replace the current block grant allocation payment to public hospitals; it is proposed in the Government’s new ‘Money Follows the Patient’ (MFTP) consultation document, Maureen Browne reports.

A prospective case-based payment system (Diagnosis Related Group system) will replace the current block grant allocation payment to public hospitals; it is proposed in the Government’s new Money Follows the Patient consultation document.

The paper says that the scheme should start in shadow form this year, when shadow funding should be rolled out to the hub hospital of each new hospital group.

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Maureen Browne
Maureen Browne

To run the new system, a National Information and Pricing Office with multi-stakeholder oversight and strong clinical representation would set national DRG prices for the year ahead using activity and cost data and a  separate purchasing entity, the Healthcare Commissioning Agency would be grown from within the HSE.

The MFTP consultation document recommends the new payment system should ultimately apply to episodes of care provided in a Medical Assessment Unit/Acute Medical Assessment Unit/Acute Medical Unit, Clinical Decision Unit, day ward or inpatient ward and all comparable episodes of care which are, or could be, delivered on a side-room or outpatient basis.

Emergency Department and Minor Injury Units, outreach services, teaching and research costs and long term residential care should all be financed separately and outside of the ‘Money Follows the Patient’ system.

Emergency Department and Minor Injury Units, outreach services, teaching and research costs and long term residential care should all be financed separately.

The paper says that, in addition, outpatient services which are ancillary to a defined treatment or episode of care (e.g. initial consultation, assessment and follow up) should not be bundled into the main payment for reasons of complexity, although this approach should be kept under review.

It says that services should be defined and priced by reference to complexity-adjusted episodes of care and not by reference to setting. The same service should attract the same price whether it is delivered in a daycase ward or a side-room/ outpatient setting and prices should not differ depending on the category of hospital.

The MFTP consultation document states that this approach is consistent with the immediate creation of Hospital Groups and is central to the longer-term policy intention of Hospital Trusts operating on a level playing field.

In terms of the classification system, episodes of care should be defined using the existing Hospital Inpatient Enquiry Scheme (HIPE) and the related AR-DRG grouper. The system should also be underpinned by quality guidelines in terms of defining how a service should be delivered – a ‘best practice’ approach.

In line with Government policy, it is proposed that mental health care should be treated in a similar manner to other acute episodes of care and funded on a ‘Money Follows the Patient’ basis. However, given the many challenges involved in transitioning towards case-based payments, it is suggested that ‘Money Follows the Patient’ begin with the existing AR-DRG system and transition towards the inclusion of acute mental health treatment.

In line with the ultimate goal of a value-based purchasing system, it is recommended that prices should be based on best practice pathways.

It is recommended that the new system should encompass an outlier payment mechanism to take account of exceptional high cost cases.

“When aligned with trading rules, this approach can provide a powerful tool for driving optimal quality of care. It is also fair, efficient and transparent in that prices are based on pre-agreed, published guidelines and hospitals are then appropriately reimbursed for providing services to that standard. As such, the approach is also consistent with the proposal to develop prices which are independent of setting and which support provision of care in the most appropriate setting. Moreover, the approach could also represent a logical starting point for the future development of integrated payment systems.”

“However, the major disadvantage associated with best practice pricing is the time required to achieve consensus on what constitutes ‘best practice’ and to develop robust guidelines. As such, it is proposed that the system should begin by setting prices by reference to average costs but with a view to implementing best practice prices on an incremental basis.

In calculating prices, it is recommended that the existing approach of indirect price-setting using relative weights should be maintained. However, the approach will have to take account of the move towards best practice pricing.

Generally speaking, the price for an episode of care should encompass all costs appropriately associated with the delivery of that care. It is, therefore, recommended that the price should encompass:

  • Pay costs (Consultants, NCHDs, Nursing, Paramedical, Administration, Support Services, Catering, Porters and Maintenance).
  • Non Pay Costs – such as medicines, blood, medical and surgical supplies, radiology, laboratory equipment and supplies, heat, light and power etc.
  • Costs of diagnostics, medical services, theatres, laboratories, wards and overhead allocations as appropriate.
  • Costs of the clinical indemnity scheme as it relates to public hospitals (although a mechanism for including such costs may need to be developed over time).

It is recommended that certain other costs should be excluded from the calculation of the price in the initial years of the scheme, including capital and depreciation, superannuation and bad debts. However, it is suggested that these matters should be kept under review, particularly, in the context of moving to a single-tier UHI system involving both public and private providers.

“In the interests of fairness and sustainability”, it is recommended that the new system should encompass an outlier payment mechanism to take account of exceptional high cost cases. Outlier payments should be based on length of stay thresholds and should be linked to medical necessity, i.e. once a patient is deemed medically fit for discharge, no payment should apply for further time spent in an acute hospital setting.

In line with international evidence, it is recommended that the price-setting function should be independent of the purchasing function. It is, therefore, proposed that a new National Information and Pricing Office with multi-stakeholder oversight and strong clinical representation be established. This Office would set national DRG prices for the year ahead using activity and cost data.

A separate purchasing entity, the Healthcare Commissioning Agency, should be grown from within the HSE before being established as a new statutory agency. The Agency would use the national DRG pricelist, in addition to the global hospital budget and service targets handed down by the Minister, to conclude annual performance contracts with each public Hospital Group.

These annual performance contracts would set out activity targets by quarter to be funded at national DRG prices. They would also include quality targets underpinned by financial sanctions. The Healthcare Commissioning Agency would then pay Hospital Groups the national DRG price on receipt of confirmation that pre-agreed activity had been delivered. “In this way, hospitals would receive a fair and transparent price for the care they deliver and would be encouraged to provide quality care in the most efficient manner.”

The paper states that where, as part of the global hospital budget, the Minister provides funding for additional targeted activity, and this should have to be pre-approved by the Healthcare Commissioning Agency and could be paid at rates other than the national DRG price.

Only hospitals which meet their activity in the previous quarter would be eligible to bid for this additional funding. In other words, if a hospital had a waiting list, then people could be taken off it and treated elsewhere but the funding would have to follow the patient.

The information submitted by Hospital Groups for the purposes of payment would be subject to audit and would also be used (i) to set national prices for the coming year and (ii) to inform structured consultation with all stakeholders on any proposed changes to the DRG system. “In this way, the pricing system would be subject to continual modification so that it remains fair and fit for purpose.”

The consultation document says that successful introduction of the new policy is also crucially contingent upon a number of other policy initiatives, in particular the development of Hospital Groups.

In acknowledgment of the time required to create new Hospital Groups and to develop the building blocks outlined above, it is proposed that ‘Money Follows the Patient’ would start in shadow form in 2013. This would involve hospitals continuing to receive their existing base budget under a vote cashing system. However, a process would be put in place to compare, on a systematic and periodic basis, (i) actual hospital activity against pre-agreed baseline activity targets and (ii) hospital expenditure against pre-agreed DRG prices. In this way funding variances and potential impacts would be highlighted although no changes would be made to a hospital’s budget on foot of the exercise.