Clinical budgeting for allied health: some options and issues in a hospital setting, CHERE Discussion Paper No 30

Structural and micro-economic reforms have been recommended for hospitals as part of an overall scheme of health care reform. One of the recommended reforms, clinical budgeting, is a health services adaptation of transfer pricing, which is used routinely in commercial enterprises. It involves the holding of budgets by clinical departments which are then used to "pay" for services provided by other departments. Clinical budgeting raises new issues about the contracting process, the monitoring of the contract in action and contestability (i.e. potential competition for the supply of goods and/or services). In 1991, at Westmead Hospital, a pilot study was proposed to investigate the impact of changed funding arrangements within a hospital department. This first stage has been reported by Iskander et al (1993). This paper sets out the options which were developed for funding arrangements, including a negotiated service agreement between a service department (Speech Pathology) and a clinical department (Geriatric Medicine). Each option was rated against specific criteria. The (financial) risks and benefits to SP and GM of implementing the options were assessed by examining the impact on GM and SP of a decrease in the budget (e.g. a productivity cut), an increase in throughput (i.e. an increase in activity), an externally influenced increase in costs (e.g. a wage rise) and an externally influenced new demand (e.g. a radical new treatment). A modification of the existing organisational structure was considered the most appropriate and feasible to trial. That is, the SP budget remains with SP, as SP are ultimately responsible for their service delivery. In addition, the contract between GM and SP will be more explicit. A negotiated service agreement between GM and SP will set out a mechanism for describing, agreeing to and regulating the volume and mix of SP services available to GM, taking into account quality and outcomes of care. This option recognises the shared knowledge necessary for patient care and the consensus needed between clinical, service, support and patient groups for health care to work well. The failure inherent in the health care market means that limitations should be placed on a purely "market forces" approach to the negotiations for and the implementation of a service agreement. Concepts of competition and regulation by market forces do not sit well in a system that was founded and still operates on principles of altruism and co-operation. In a competitive and individualistic environment, the modern economic theory of the firm explains that firms arise in response to high transactions costs associated with contracting and decentralised decision making. In an organisation as large and complex as a hospital, a consensus approach to decision making is necessary. If service agreements are to be negotiated in a co-operative fashion, then some rules need to be agreed and an arbitrator appointed who would act to resolve disputes within the boundaries of the rules. Experience from the UK suggests that the principles for dispute resolution should be clearly enunciated prior to the introduction of a clinical budgeting system.