Optimizing payments based on efficiency, quality, complexity, and heterogeneity: the case of hospital funding

• DOI: http://doi.org/10.1111/itor.12713
• Published date: 01 July 2020
• Date: 01 July 2020

Intl. Trans. in Op. Res. 27 (2020) 1930–1961

DOI: 10.1111/itor.12713

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Optimizing payments based on efficiency, quality, complexity,

and heterogeneity: the case of hospital funding

Diogo C. Ferreiraa,b,∗, Alexandre M. Nunesa,b and Rui C. Marquesa

aCERIS, Instituto Superior T´

ecnico, Universidade de Lisboa, Av. Rovisco Pais, 1, 1049-001 Lisbon, Portugal

bCAPP, Instituto Superior de Ciˆ

encias Sociais e Pol´

ıticas, Universidade de Lisboa, R. Almerindo Lessa, Lisbon, Portugal

E-mail: diogo.cunha.ferreira@tecnico.ulisboa.pt [Ferreira]; anunes@iscsp.ulisboa.pt,

alexandre.m.nunes@tecnico.ulisboa.pt[Nunes]; rui.marques@tecnico.ulisboa.pt [Marques]

Received 6 November2018; received in revised form 27 May 2019; accepted 12 August 2019

Abstract

In several countries around the world,public hospitals are paid for by the health care services they provide to

the population. Different funding systems areavailable,such as the Beveridge Model. Furthermore, payments

can be either prospective, retrospective, or even a merging of both. Payments are usually nonoptimal in the

Pareto sense and disregard the quality of delivered services as well as the environment (either internal or

external) in which hospitals operate. This gap may introduce inefficiencies and inequities in the health care

system, which currently faces scenarios of reduction/scarcity of resources. Furthermore, there are problems

related to overpaying and misallocation of resources. Hence, payments should be optimized to guarantee an

efficient allocation of resources to the health caresystems. This study proposes a new best practice based tool,

applying it to the Portuguese National Health Service. Considerable cost savings may emerge for inefficient

hospitals if the model is successfully employed.

Keywords:hospital funding; best practices; efficiency; quality; heterogeneity

1. Introduction

The World Health Organization’s Constitution defines “the enjoyment of the highest attainable

standard of health” as one of the fundamental rights of any human being (World Health Organi-

zation, 2002). Each nation is responsible for allocating resources to its own health care systems,

according to prespecified financing (or funding) programs to guarantee that the citizens’ quality of

life is continuously improving. Such an allocation of resources should be financially sustainable, or

as much efficient as possible,and must not disregard dimensions like quality of care (Gim´

enez et al.,

2018). Hereinafter, the term efficiency means the capacity of treating patients with the available

resources, with the minimum waste, and regardless of the occurrence of complications, deviations

∗Corresponding author.

C

2019 The Authors.

International Transactions in Operational Research published by John Wiley & Sons Ltd on behalf of International Federation

of Operational Research Societies

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License,which

permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no

modifications or adaptations are made.

D.C. Ferreira et al. / Intl. Trans. in Op. Res. 27 (2020) 1930–1961 1931

from evidence-based medicine guidelines, or even in-hospital mortality episodes. However, the

quality of services should also be ensured and, if possible, maximized. Quality in health care in-

cludes criteria such as the patients’ satisfaction, the improvement of their quality of life, and the

provision of appropriate, timely, and safe services of health care (Donabedian, 2005). A hospital

can be efficient on its resources usage because it treats all patients without waste, but divests on

quality (e.g., infrastructure to be improved, technology to be updated). Such an entity cannot be

considered a benchmark among its peers. A better scenario is the one where hospitals are efficient

and do not sacrifice the quality of their care services.

Public expenditures with health care have increased considerably in the past few years due

to phenomena including the ageing population, citizens empowerment, technological innovation

and development, and increase in hospital costs, partially resulting from inefficiency (Bhat, 2005).

Policy-makers and health caremanagers are then under pressure for a greater control over resources

allocated to health care funding. The different available systems of funding are usually designed to

control these expenses and to improve the efficiency of care providers (Boadwayet al., 2004). Budgets

and payments may result from a conical combination of patients or provided services multiplied

by a defined unitary price. Whether this price is based on Pareto-efficient activities is a question

that has not been discussed in the literature. The optimization of these prices to be paid should

account for three main factors: the technical/cost efficiency of health care providers, the quality

of their delivered services, and the homogeneity degree among them regarding their operational

environment. Disregarding, at least, one of these dimensions may lead to unfair/unreasonable

payments (Busse et al., 2013). Mehta et al. (2008), for instance, suggested that accounting for

hospital differences in patient characteristics may impact hospital performance and eligibility for

financial benefits in some performance-related payment programs. Thus, ignoring the environment

is a major pitfall in most of the found performance analyses.

Portugal has a national health service (NHS) composed mainly of primary and secondary health

care providers. These are public, not-for-profit organizations, and are funded mainly by taxes

collected from citizens. The Portuguese NHS aims at providing the appropriate and equitable care

to all citizens, regardless of their ability to pay. The NHS is then said to be universal, equitable,

and tendentiously free (because co-payments are charged to some customers). This means that the

system must be financially sustainable, in particular the hospitals that consume more than half of

the public health expenses. However, several authors have repeatedly reported considerable levels

of waste and inefficiency among Portuguese public hospitals (Ferreira and Marques, 2015, 2016a;

Ferreira et al., 2017). Portuguesecurrent expenditures on health care have grown considerably since

the beginning of the new millennium. In 2000, those expenses were about€10.7 billion, or €1045 per

capita; meanwhile, that value reached €16.5 billion, or €1602 per capita, in 2016. The difference of

more than €5.5 billion in that period corresponds to a nearly 54% increase in current expenditure

on health care. In terms of gross domestic product (GDP), there was 0.5% increase in expenses

on health care in 2000–2016. Until 2010, there was an increase in current expenditures. However,

the period 2011–2014 was featured by the Economic Adjustment Program for Portugal (or Bailout

Program), which has dictated a decrease in public expenses, including the ones with health care.

Since the exit from the program,the expenses with health care have noticed nominal increases,but at

a smaller rate compared to the precrisis period. In 2016, the Portuguese public health care expenses

reached €1061 per capita, which is more than 66% of the total health care current expenses. Note

that, in theory, the financial crisis and the cost constraints in the health sector may have had negative

C

2019 The Authors.

International Transactions in Operational Research published by John Wiley& Sons Ltd on behalf of International Federation

of Operational Research Societies

1932 D.C. Ferreira et al. / Intl. Trans. in Op. Res. 27 (2020) 1930–1961

effects on the quality of delivered care services and on the citizens’ access to the appropriate care.

As such, there are potential problems related to overpaying inefficient hospitals and poor allocation

of resources, which are meant to be exceeded in this study.

The current study aims to provide a tool to optimize payments for each Portuguese public not-

for-profit secondary health care provider (hospital), using information of itself and of its potential

Pareto-efficient benchmarks (peers)—including costs, delivered services (production), quality of

services, and environmental (either in- or out-hospital) data. This information is used to achieve

optimal payments and, then, the best allocation of resources and possiblecost savings for inefficient

entities. The decision-making unit in the present case is the hospital, particularly its board of

directors who manage resources within the institution. However, funding processes may occur

at different levels of care (e.g., the hospital as whole, its services, or the diseases by severity level).

Therefore, the tool proposed here is ableto disclose payments by level of care. It is worthmentioning

that, since the payment optimization is based on providers performance (efficiency and quality),

the resulting budget can be classified as a prospective perfor mance-based bundled payment, which

is one recent iteration of pay for performance (P4P) (Satin and Miles, 2009).1

2. Different ways of funding providers for health care provision

Funding health care providers has been a tool adopted to control expenditures and to minimize

waste. There are several financing (or funding) schemes adopted all over the world. It is worth

mentioning that the way providers are funded usually has an impact on their behavior, particularly

regarding the equity on access to health care, efficiency, and quality. Health care outcomes are, in

general, direct results from the adopted funding scheme. This section presents and discusses the

main funding schemes by providing their characteristics, advantages, and shortcomings.

2.1. Funding health care providers: definition

Funding health care providers is a broad concept, encompassing both resources collection and funds

allocation by the differenteconomic players in the health sector. The allocation of resources(usually,

money) should cover the efficient expenses, which are the ones strictly necessary to treat all patients

in an equitable and effective manner. Waste is, then, the rest of the resources unnecessarily spent.

The funding scheme is a set of objectives and rules made by policy-makers, health care managers,

and clinical staff, simultaneously to satisfy the citizens/costumers’ needs and to ensure that the

health care system remains financially sustainable.

This study centers itself on hospital funding. Nevertheless, the framework here proposed can

straightforwardly be adjusted to other health care providers such as physicians. In view of this,

hospital funding can be either retrospective or prospective, depending on whether the budget

covers the entire costs incurred by providers or defines a lump sum prior to the provider’s annual

activity/local patients’ needs. In other words, a retrospective or prospective payment occurs after

1Although in the present case,payment optimization considers only efficiency and quality,these concepts are not synonyms

and do not fully explain performance.The other most frequently used/discussed dimension is equity (Davis et al., 2013).

However, there are other dimensions.

C

2019 The Authors.

International Transactions in Operational Research published by John Wiley & Sons Ltd on behalf of International Federation

of Operational Research Societies