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Activity based payment in hospitals: Principles and issues drawn from the economic literature and country experiences

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  • Zeynep Or

    () (IRDES institut for research and information in health economics)

  • Thomas Renaud

    () (IRDES institut for research and information in health economics)

Abstract

In 2005, France joined the ranks of most other developed countries when it introduced an activity based payment system to finance all acute care hospitals. Despite some basic principles in common, the design of these systems can vary significantly across countries. In order to understand better the issues raised by the new system in France, this paper examines the economic rationale for such a system, the key implementation decisions to be made and the challenges involved. The principle of paying hospitals according to their activity in relation to homogeneous groups of patients has some obvious advantages to improve efficiency and the transparency in health care financing. However, the literature and the experience of the other countries presented in this paper show that this mechanism of payment presents a certain number of risks and requires regular and careful adjustments to obtain the benefits expected of such a system. To ensure both the clinical and economic coherence of the classification used to define hospital activity, and to establish the corresponding level of tariffs, constitute two major challenges. The principle of paying a fixed price which is directly indexed on the average costs observed and which remains common to all types of hospitals has been increasingly subject to criticism. Furthermore, activity based payment, by its nature, can induce some perverse effects which requires complementary regulatory mechanisms to guarantee the quality of the care and equitable access. From the point of view of controlling health expenditure, it is equally important to follow closely the evolution of health care activity in different hospital settings, as well as in ambulatory care, since activity based payment may encourage hospitals to increase their activity by inducing greater demand for profitable services while shifting part of their costs towards medium/long-term care settings or to home-based or informal care.

Suggested Citation

  • Zeynep Or & Thomas Renaud, 2009. "Activity based payment in hospitals: Principles and issues drawn from the economic literature and country experiences," Working Papers DT23, IRDES institut for research and information in health economics, revised Mar 2009.
  • Handle: RePEc:irh:wpaper:dt23
    as

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    File URL: http://www.irdes.fr/EspaceRecherche/DocumentsDeTravail/DT23PrincipEnjeuxTarificActiviteHopital.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
    1. Chalkley, Martin & Malcomson, James M., 1998. "Contracting for health services when patient demand does not reflect quality," Journal of Health Economics, Elsevier, vol. 17(1), pages 1-19, January.
    2. Drummond, Michael F. & Sculpher, Mark J. & Torrance, George W. & O'Brien, Bernie J. & Stoddart, Greg L., 2005. "Methods for the Economic Evaluation of Health Care Programmes," OUP Catalogue, Oxford University Press, edition 3, number 9780198529453.
    3. Ellis, Randall P. & McGuire, Thomas G., 1990. "Optimal payment systems for health services," Journal of Health Economics, Elsevier, vol. 9(4), pages 375-396, December.
    4. Chalkley, Martin & Malcomson, James M., 2000. "Government purchasing of health services," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 15, pages 847-890 Elsevier.
    5. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, January.
    6. Sloan, Frank A., 2000. "Not-for-profit ownership and hospital behavior," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 21, pages 1141-1174 Elsevier.
    7. Street, Andrew & Maynard, Alan, 2007. "Activity based financing in England: the need for continual refinement of payment by results," Health Economics, Policy and Law, Cambridge University Press, vol. 2(04), pages 419-427, October.
    8. Kathryn Antioch & Randall Ellis & Steve Gillett & Daniel Borovnicar & Ric Marshall, 2007. "Risk adjustment policy options for casemix funding: international lessons in financing reform," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 8(3), pages 195-212, September.
    9. Andrew Street & Kirsi Vitikainen & Afsaneh Bjorvatn & Anne Hvenegaard, 2007. "Introducing activity-based financing: a review of experience in Australia, Denmark, Norway and Sweden," Working Papers 030cherp, Centre for Health Economics, University of York.
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    More about this item

    Keywords

    Activity based payment; hospital; regulation; international comparison.;

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H4 - Public Economics - - Publicly Provided Goods

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