The related topics of risk and incentives often come up when we think about hospital payment systems. Let's take a look. First risk, hospital payment systems can move risk around. We can think of a continuum here. On one end, fee-for-service systems transfer the least or maybe no risk from intermediaries to hospitals. The intermediaries keep the risks associated with patients needing more or less medical care. Per diem systems transfer some risk. Here, hospitals would not be at risk when more people get sick or need hospital care, or when patients need to stay longer because they get paid every time more people get sick or every time people stay longer. The intermediary keeps that risk. But the fixed payment per day, would leave the hospital on the hook for how much care gets delivered in the day. If patients get a lot of care and that costs the hospital a lot, they'd have the responsibility for that. DRG systems transfer even a bit more risk. Here the hospital gets a fixed payment per discharge. Now when a patient needs more days in the hospital, or when they need more services per day, the hospital has to bear the cost of that. Outlier payment components might help with this, but they probably don't entirely eliminate the risk. Global budgets would transfer the most risk. Here the hospitals got a fixed budget and accepts the risk associated with whether people get sick or not, and the variations in the amount of care they're going to need. Related, though a little different, is the topic of incentives. Hospital payment systems, like any payment system, create some incentives. We can think about how these incentives might affect healthcare delivery. Fee-for-service would tend to create incentives to perform more services which generate more revenue for the hospital. Per diem systems similarly, would tend to create incentives for hospitals to keep patients in the hospital longer. You might think some hospitals would take these incentives very seriously and respond strongly, and that indeed can happen. But it's often more fair to think of this in a more subtle way, I think. There might be reasons that would tend toward patients staying in the hospital longer, and fee-for-service or per diem, simply allow that to go on and provide no reason to try and shorten hospital stays as they creep to include more and more services and longer times. When there's a decision that could go either way, they probably skew toward longer or more services. This just enables, in the long run, hospital stays to get longer and more services to be provided. DRG systems, on the other hand, create incentives to keep patients in the hospital less time, shorter hospital stays. Once you pay the fixed amount per admission to the hospital, the hospital then benefits if they can get that patient out as soon as possible and get another patient in, because the new admission will generate a new DRG payment. Global budgets would provide the strongest incentives to minimize the amount of care, the amount of work that gets done for each patient. From a quality and resource use perspective, we can get some trade-offs. Toward the fee-for-service and the per diem end of the spectrum, we worry less about under-use of care, which might be good, but we might worry about creating overuse. Patients staying in the hospital longer than they need to, for example. On the other end of the spectrum, the opposite. We steer toward reduced overuse, but we start to risk under-use, patients getting kicked out before they should be. An important issue related to incentives for hospitals, stems from the fact that hospitals and physicians are often in separate organizations. But physicians are in control of a lot of things that happen in the hospital, which treatments patients get, how long they stay, those can be strongly affected by physicians. When hospital administrators have a particular incentive, say to shorten lengths of stay, one of their real challenges can be getting the physicians to go along with that. When the physicians don't exactly work for them and may have their own ideas about what they want to do. One reason that people sometimes like to think about more integrated organizations with physicians working more directly for the hospital say, is that these can get incentives aligned. Despite the misalignment of incentives that can happen though, there's evidence from studies that suggest that these incentives do function in these ways. When you use DRG systems, you do tend to get shorter stays as opposed to fee-for-service or per diems, where you do tend to get longer stays. That leads to some interesting questions about system design. Of course, we need a hospital payment system, we can't really get by without one. But whatever we do, we're going to create some incentives. How do we cope with this then? That's something that systems have to think about, and there are various solutions. Maybe you can take a fee-for-service or a per diem system, but at other measurement or monitoring to try and minimize over-use of services. Maybe you can nudge hospitals in other ways to keep patients from staying too long, or maybe you go DRGs, but with other mechanisms to monitor quality and outcomes that might indicate if patients are going home to early, so you could work to prevent that. In the end, these incentives are complicated and evolving, something that we really need to pay attention to, if we're going understand how our payment systems affect healthcare delivery.
