Payment for Hospital Services
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Part I – Payment for Hospital Services
Advantages and disadvantages of the hospital payment systems on cost containment and provider behavior
A payment system is a contract providing health services to patients. Examples of such plans include Fee-for-Service, per Diem, The DRG-Based Payment System (i.e. Medicare’s Inpatient Prospective Payment System) and Capitation.
Fee-for- Service
The Fee-for-Service plan is also known as indemnity health insurance. It offers maximum flexibility on the members’ choices for medical services; doctors and hospitals (Researchomatic). It is the most flexible plan since the patients can see a doctor wherever needed even outside the state for the insurance policy (Researchomatic). There are no waiting periods needed to seek advice and consultation of a specialist. However, the plan has the disadvantage of being the most expensive. There is also little attention provided for preventing medicine and care (WHO, 2007).
Per Diem
Per Diem is a daily payment plan. It encourages providers providing better services (Researchomatic). The hospitals are encouraged to increase the number of admissions and extend the length of stay. This works to enhance medical expenditure (WHO, 2007). The plan has the advantage of simple administration and more attention being accorded to the patients (WHO, 2007). The plan however does not give incentives to restrain costs. It therefore has the disadvantage of encouraging provision of less cost effective treatment because of its motivation to increase the number of admissions and the length of stay for patients (Researchomatic).
The DRG- based payment system (For example, Medicare’s Inpatient Prospective Payment System)
The DRG, short for Diagnostic Related Groups, classifies patients into groups economically and medically similar, expected to have comparable hospital resource use and costs (WHO, 2007). Providers are reimbursed at a fixed rate per discharge based on diagnosis, treatment and type of discharge (WHO, 2007). This plan has a strong incentive for cost containment. It encourages providers to deliver services that are as cost effective as possible within the shortest length of stay as possible. It thus reduces unnecessary care. Major concerns, however, that form the disadvantages of this plan are that of premature discharge, discrimination of patients with preference to low cost ones; this is because cost is monitored and there can therefore be the risk of undertreatment. This means that those patients at high risk may end up missing on quality health care since providers are in a bid to cut on cost. This is probably done at the expense of the quality of the health care given by the said health care providers.
Capitation
In this plan, providers are paid a fixed amount of money depending on the number of patients. The providers therefore deliver a wide range of services (WHO, 2007). The scheme has the advantage of cost containment and is good in provision of preventive care. Capitation can be said to be the most cost effective plan. There are however concerns of underprovision of services especially within the high-risk groups. Another disadvantage is that there is an increase in the number of referrals to hospitals and specialists and the plan encourages provision of low quality care to the patients (Researchomatic).
Given these advantages and disadvantages of health insurance plans used in the provision of health care, there are suggestions to make use of a hybrid of several of the plans rather than one of the plans. This is in order to take advantage of the benefits of each of the plans and at the same time provide cost effective health care that also takes into consideration the quality of health care provided by various health care providers.