Module 4_Purchasing health services

Once revenues have been raised, and subsequently pooled, they are then used to purchase health
services. Purchasing is another core function of the health financing system.
In this module, we will explore the different arrangements used in countries to purchase health
services. We'll also explore some of the challenges facing those agencies responsible for purchasing
and how these challenges can be overcome.

Select the framework to see which intermediate objectives and final coverage goals are most directly
influenced by the way in which health services are purchased.

Definition of Purchasing

This topic will explore the features and benefits of strategic purchasing.

First of all, what do we mean by 'purchasing'?

"Purchasing" refers to the allocation of pooled funds to providers that deliver health care goods and
services.

You can find out more about the pooling of funds and benefit package design in modules 3 and 5,
respectively.
Moving towards more strategic purchasing of health services is central to improving health system
performance and progressing towards UHC. This means allocating funds based on the following type of
information:
which services should be delivered as a priority, based on a health needs assessment of the population

 how the staff and facilities delivering the services are performing
 what is the price, quantity and quality of services delivered, and how might negotiation and
incentives contribute to improved performance

By considering each of these factors in allocation or purchasing decisions, progress can be made on both
UHC intermediate objectives, and final coverage goals.

A strategic purchaser, however, allocates funds in a way which actively promotes improvements in
service quality and efficiency, through the use of incentives and administrative mechanisms. An
example of this is paying hospitals based on the number of patients successfully treated, following a
review to ensure that the services provided were appropriate.
Strategic purchasing
As you have just learned, strategic purchasers consider carefully how to allocate funds; therefore, they
need to have a lot of information to hand, including:
the existing burden of disease categorised by a range of variables e.g. age, gender, geographical
distribution

 how cost-effective the available interventions are

 how well interventions are currently delivered by existing providers; for instance, in terms of
price and quality
 how much money is currently being spent on different health services
 spending projections - how much money do they expect to have in the next 2-3 years.

Increasingly, strategic purchasers are using performance or results-based payments as part of their
overall approach to paying providers.

In England, for example, under the Quality and Outcomes Framework, Primary Health Care providers
receive an annual reward payment based on a number of indicators of performance, including how
well they manage some of the most common chronic diseases, such as asthma and diabetes.
Providers are also rewarded for conducting preventive services such as regular blood pressure
checks.

In a very different context, Afghanistan, performance contracts have been agreed with providers.
Under these contracts, the performance of a health facility is measured on eleven 11 indicators
related to mother and child health services. Providers receive reward payments according to how
well they perform across these indicators.
Institutional arrangements
Institutional arrangements are also important for strategic purchasing.
The main policy issues include:
whether or not to introduce a purchaser which is independent of providers, a situation often known as a
'purchaser-provider split'

 whether there is only one purchaser of services or multiple purchasers

 the extent to which purchasers and providers are autonomous; for example, the flexibility they
have to manage their own budgets and make decisions on staffing.
Health purchasing agencies have several strategic tools or mechanisms at their disposal, including:
the agreement or contract made with the provider which defines the conditions which need to be met for
payment

 the indicators and measures used to measure performance

 the specific payment mechanism(s) used to actually pay providers, and on what conditions.

In the next two topics, we will focus on the different payment mechanisms which can be used for
purchasing primary health care services and hospital services.
In the Republic of Korea, the Value Incentive Program was established in July 2007 to reward service
excellence in hospitals. Six indicators are used to assess the quality of care for acute myocardial infarction
and caesarean sections including, for example, the rate of thrombolytic drug administration within 60
minutes of a patient's arrival at hospital.
In addition to making the results public, financial rewards or penalties amounted to 1% of payments by the
National Health Insurance Corporation.
The programme was expanded in 2011, with an additional tier of 2% financial incentives or penalties
introduced.
Capitation funding sets a limit on total payments to the service provider. In doing so, financial risk is
transferred to the provider. One disadvantage of this approach, however, is that services may be
under-provided, for example if a patient is referred to a specialist when they could have been treated
at the primary health care facility.

Without close monitoring and supervision, some health facilities may try to avoid those patients with
greater health needs who are likely to cost significantly more to treat.

Recognizing the incentive for under-treatment in capitation funding, purchasing agencies in many
countries have introduced a mixed approach, for example by combining capitation payments with
performance-based payments. In addition to getting the incentive right, clear guidelines backed up
by monitoring and supervision, are also important to limit the potential downside of relying only on
capitation funding.
The Kyrgyz Republic was one of the first countries in the former Soviet Union to make significant
reforms to its health system, which was suffering from a massive over-supply of hospital
infrastructure. One of the main reasons for this over-supply was the way in which hospital budgets
were formulated. Based on line-item budgets, the more beds there were in a hospital facility the
more money it received. The provider payment mechanism provided a clear incentive for facilities to
expand in size.

In 2001, the Kyrgyz government introduced provider payment reforms that changed this incentive in
order to encourage hospitals to reduce in size. This reform helped to reduce costs and in turn
enabled health facilities to devote more public funds to medicines and other patient treatment items
which had been in short supply.

Fee-for-service
As you have learned, fee-for-service is one method of paying for primary care, but is more commonly used
as a retrospective means of paying for hospital services.
With fee-for-service, there is a clear link between the volume of services provided and the total payment,
creating an incentive for providers to over-diagnose and over-treat, often referred to as supplier-induced
demand. Without a clear budget constraint this can lead to cost escalation, the provision of
unnecessary care, and greater inefficiency in the health system.
Example: The Thai Civil Servants Medical Benefits Scheme has high rates of caesarean sections driven
largely by this method of payment.

Diagnosis Related Groups (DRGs)

To address the incentive problems arising with fee-for-service payments, many countries have started to
prospectively define payment rates per hospital case (case-based reimbursement) rather than for each
service provided. A common approach is to use Diagnosis Related Groups (DRGs) to create case
categories that are similar in terms of both clinical composition and the average cost of treatment.
However DRGs, or similar payment systems which pay a fixed amount for the treatment of a particular
condition, also face challenges. One of these is that patients may be discharged earlier than is clinically
ideal; a second is that admissions may be "upcoded" into a case group with a higher reimbursement rate.
By paying per case, there remains an incentive for unnecessary admissions, especially for relatively
uncomplicated cases. In response, many countries combine DRG case payment with a budget cap to set an
overall limit on funding.
As with all payment mechanisms, close monitoring and regulation is critical to counteract and limit the
negative responses to the incentives of DRGs.