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A new method of funding healthcare

The manner in which a health service spends money is always closely scrutinised. Any health service is a vast network of competing interests, and ensuring resources are spent fairly is far from straightforward. In Ireland, examining the allocation of resources was even more pressing during the recent recession. As funding dried up, the HSE was expected to become more efficient, with the mantra ‘doing more with less’ frequently repeated.

One area that came under the fiscal microscope was the issuing of block grants to hospitals. This historical method of funding was criticised on the basis of being wasteful, as the block grants did not properly reflect the work being done by hospitals. It was proposed that a better method would be for the funding to match activity though a prospective funding model. Many other countries were gravitating towards this model in order to develop a more nuanced approach to healthcare funding.

The then Minister for Health Mary Harney established an Expert Group of Resource Allocation and Financing in the Health Sector in 2009 to examine the issue. The Expert Group was to assess how the existing system of resource allocation within the Irish public health service could be improved. In its report, which was published in July 2010, the group stated it received many submissions criticising annual budgets and block-funding of hospitals. The issues raised in the submissions to the Expert Group included: Inadequate health services and regional disparity in the allocation of funding for services as a result of historical funding arrangements; and annual budgeting and the subsequent delays in business planning resulting in a less efficient and effective system for service users and a negative impact on value for money.

It was also stated that block grant funding to service providers, in addition to not being transparent, did not support an individual’s choice of provider.

“The main areas of agreement in the submissions were on the need for multi-annual budgeting, that funding should follow the service user, and the inclusion of only core health services in the health budget,” according to the document.

“Other areas of agreement were the need for information activity systems and the sustainability of health services.”

Fine Gael’s plan

A change of Government in 2011 did not push the issue off the agenda. Fine Gael’s FairCare document promised a universal health insurance system, but before that could be implemented, it wanted to introduce the ‘Money Follows the Patient’ (MFTP) model, similar to the one spoken about by Minister Harney. According to a party paper from 2009, under the existing system of fixed budgets, each additional patient is effectively a ‘cost’ to the health service.

“This system provides no incentives for efficiency or productivity,” according to the document.

“Under MFTP, health providers will be paid for how many patients they treat. Patients will be a source of ‘income’ rather than a ‘cost’, just as they are in private hospitals today.”

As with the ultimately failed plan to introduce universal health insurance, progress in introducing the model proved slower than initially anticipated. It was not until 2013, two years after entering Government, that a detailed plan for introducing MFTP was developed. A document was published that year, titled Money Follows the Patient: Policy Paper on Hospital Financing.

The report cited the results of a pilot project in Cappagh National Orthopaedic Hospital, which demonstrated positive productivity gains with MFTP. There was a two-day reduction in average length of stay and a 45 per cent increase in day-of-surgery admission rates, without raising any quality concerns.

The paper reiterated the benefits of a prospective funding model and also gave concrete details as to how it would be introduced. Firstly, a new National Information and Pricing Office was to be established. The Office would use cost and activity data to set national prices for ratification and publication by the Minister.

The Minister would publish these prices alongside details of the overall MFTP budget and the national service targets and priorities to be delivered from within that budget. A separate Healthcare Commissioning Agency (HCA) would be developed from within the HSE and would be responsible for agreeing performance contracts and making payments to Hospital Groups.

A case-based funding model using Diagnosis-Related Groups (DRGs) was to be introduced. DRGs are a method of classifying patients into clinically-meaningful and economically-homogenous groups.

It was noted that the new National Information and Pricing Office and the Healthcare Commissioning Agency would be developed using existing organisational structures, as well as existing staffing and resources (eg, the staff of the National Casemix Office).

The policy proposed that MFTP would be introduced on a shadow funding basis in 2013 and would apply to the major or ‘hub’ hospitals of each Hospital Group.

This meant that hospitals would continue to receive their existing base budget but a shadow funding process would be put in place to examine the potential impacts of the new model. Full phased implementation was due to begin in 2014.

Things proceeded slowly at first. In 2014, the National Casemix Programme and the Health Research and Information Division at the ESRI became the Healthcare Pricing Office (HPO).

In order to get the new funding model up and running as early as possible, the decision was made to establish the Office on an administrative basis.

The purpose of the HPO is to set prices for all episodes of care so that care can be ‘purchased’. The Office is responsible for the national costing of hospital activity; determining the national prices for hospital activity; and the national dataset of hospital clinical coding on the HIPE system.

Extensive financial modelling took place to benchmark hospitals against a national standard price and work also focused on improving the timeliness of HIPE coding.

The terminology also changed from MFTP to Activity-Based Funding (ABF).  A three-year ABF implementation plan 2015-2017 was published in May 2015.

Introduction of ABF

From 2016, hospital budgets have been separated into ABF and non-ABF (eg, pay costs) budgets for the first time, with agreed ABF activity targets and fixed ABF budgets for inpatient and day case work, and transition payments to maintain financial stability.

Implementation of ABF in acute hospitals in 2016, supported by €1 million of the additional funding of €2 million provided for overall finance reform, meant that the majority of hospital funding was based on a set number and complexity of cases, rather than by the traditional block grant.

In 2016, 64 per cent of the gross allocation was funded on an ABF basis. In 2017, this was increased slightly to 65 per cent.

In order to maintain stability in the hospital system, individual institutions were given transitional adjustments to their funding to reflect the difference between their current costs and the national average unit cost. For some hospitals, this meant receiving additional transitional funding, with the intention being to phase these transitional payments out over a number of years as hospitals move their costs towards the national average and as any structural and other issues are addressed.

Ms Maureen Cronin is Assistant Chief Financial Officer (ACFO) with the HSE. Her role covers two functions, the first being ABF with the Acute Hospitals Finance and the second being the HPO.

Ms Cronin told the Medical Independent (MI) that ABF is still very much in an “embryonic phase”, despite the fact that the majority of hospital funding is now based on the model.

“It is a multi-year programme,” Ms Cronin said.

“It is going to take a number of years to fully implement. It is going to take some time for us to feel satisfied that the coding of the clinical data and all costing are correct. In that sense, we are in an embryonic phase, which is the best way to describe it.”

Ms Cronin said it is important that the transition into fully embracing ABF is well handled.

For example, she presented a hypothetical case of a hospital with a budget of €100 million.

“We go into a hospital’s clinical coded activity for 2015 and we say, ‘here is the work you have coded, here is the national average’, what we think is our costed price for each of those DRGs, and say that comes to 90 [million euro],” she said.

“Then we would only be willing to offer that hospital 90, using a national average price. But we can’t take 10 off them and crash their payroll at the moment. So what we do, we are offering in this early phase a transition adjustment of 10. If they are spending 100 and they had a budget of 100, they are still getting 100, but we have broken it up into various components. We have been able to say ‘based on our indicative figures, you are above the average and you are below the average price’. The problem is, we know our data is not good enough yet. In Germany, for example, it took seven years for them to move through this phase. So we can’t go in uninhibited by a knowledge of the subject and take a few million off a hospital, because if their clinical data is poor because they lost coders, then our analysis is wrong. What we know when we develop a system like this, we have what we call ‘measurement factors’, so we have to ask whether the measurement of the data is accurate.”

Hospitals are in the process of adjusting to the new model. The introduction of ABF was discussed at a board meeting of the Rotunda Hospital in July 2016.

A negative deduction of €5 million in the hospital’s allocation relating to ABF was questioned.

“The Master advised the HSE this negative adjustment was based on activity and referred to the confusion around ABF,” according to the minutes.

“The hospital would welcome ABF, as it would gain significantly based on its activity against costs,” stated the minutes.

“If the ABF model was used, the Rotunda would have received a further €5 million in 2016 based on its activity and costs in 2015. The Chairman said this matter had been fully reported to the board previously and concurred that ABF would be a more effective funding mechanism for the Rotunda.”

Data

According to a paper published in the Irish Journal of Medical Science by University College Cork economists Ms Aileen Murphy and Mr Brendan McElroy in 2015, titled Patient level costing in Ireland: Process, challenges and opportunities, the main challenges for ABF centre on human capital resources and ICT capacity to ensure accurate and timely coding and reporting.

“Implementing patient-level costing represents a fundamental shift in practice, which contributes to unique challenges surrounding the infrastructure and capacity, implementation and consequences of information and communication technology systems,” according to the paper.

“Implementation costs can vary, depending on the status of pre-existing ICT resources.”

For years, the quality of the data produced by HIPE was criticised for not painting a true picture of the Irish health service. Ms Cronin said the quality of data has not been helped by the loss of staff that the health service has experienced over the last number of years.

“In the recession, when we lost large numbers of staff, often the clinical coder was moved into an outpatient clinic or something more critical in the hospital,” she explained.

“We see, for example, in the big statutory hospitals, Galway University Hospital, Cork University Hospital, Limerick, all of their coding resources were depleted and the quality and complexity of their coding wouldn’t be as good as the big voluntary hospitals — St Vincent’s, the Mater, St James’s.  You are starting, if you like, from a low base where we bring that data with the costing data and we try to create a cost for each of the DRGs in our system.”

Ms Cronin insisted that in spite of continued deficits in data, the situation has improved. In September 2016, a report produced by Pavilion Health was published, examining HIPE data and its suitability for implementing an ABF model. The report was titled National Audit of Admitted Patient Information in Irish Acute Hospitals.

According to the report, analysis and hospital feedback suggests HIPE data is sufficient to underpin ABF, with the net weighted unit (WU) variation between audited data and international comparisons being less than 2 per cent of total activity. However, the report stated ABF hospitals in general are under-representing true clinical complexity and there is a need to reduce the inter-hospital variation. Improvements in the structure and quality of the medical record are critical to improve the quality of current clinical coding and to facilitate efficient future audits. The report recommended that the HPO facilitates the sharing of best practice that currently exist within the current hospital network.

It also stated there was a need to increase a coding service manager’s profile as a key member of the hospital management team and to establish a Coding Advisory Committee to support and develop system-wide quality improvement initiatives and report back to the local hospital management team.

The report said that HPO capacity should be increased through recruiting auditors to support a national audit programme and trainers, recruited from the HIPE Clinical Coding workforce.

Speaking to MI, the CEO of Cork University Hospital (CUH) Mr Tony McNamara said the ABF model offers a number of advantages for hospitals. He said the model enables a very thorough analysis of an organisation’s cost base by linking it to activity and giving greater visibility on the impact of fixed and variable costs.

Apart from cost data, he said the system also collates a lot of activity data from the various service departments, which can be used for performance evaluation and service planning for future years.

However, Mr McNamara did admit there were challenges in implementing the model.

“ABF systems, by their nature, require large volumes of high-quality data to generate accurate cost and activity information,” Mr McNamara said.

“Setting-up the feeder systems to provide this information is challenging, both in terms of the staff time it requires and the system resources it consumes. There were also concerns by some department heads about sharing patient data with Finance (the ABF system does not hold any patient details apart from the MRN [medical record number]). The process of costing by medical specialty has been in use for a number of years. ABF is based on this system but provides a much greater level of detail; as it allocates costs at patient level, there is still some work to do on reconciling the output from both systems.”

The future

As for future plans, the intention is to bring emergency medicine and outpatients under the ABF model. This represents a change from the MTPF policy paper, which said, initially at least, these two areas would continue to be funded by traditional means. Regarding emergency services, the paper said this was because these services differ fundamentally from inpatient and day case services. It stated that emergency services are, by their nature, something which must be maintained at a certain level, regardless of actual demand. Funding outpatients through ABF was also thought to be too complex. It was suggested, however, that both matters would be kept under review.

“The policy paper stated that emergency departments were going to stay on the block grant,” according to Ms Cronin.

“And I have asked the Department to change that. We will move in time to outpatients and emergency, because to leave emergency in the block was going to be such a disincentive and so wrong. For example, one of the early challenges you have in an ABF system is it incentivises hospital admission because they get paid for an inpatient and a day case. Now an awful lot of our clinical effort is to avoid hospital admission. We want hospital avoidance.”

Ms Cronin said that she recently met head of the Clinical Programme for Emergency Dr Gerry McCarthy, who expressed concern about the issue. Dr McCarthy asked if hospitals might be disadvantaged if emergency medicine consultants and their teams did not admit patients who would be better off being sent home.

“What I will say is that this system is early; there are lots of issues and problems to be resolved yet,” said Ms Cronin.

She stressed that all would be done to ensure that the system will not prioritise patients who are more commercially attractive, which is one of the inherent risks within an ABF system.

“They [doctors] are not thinking commercially; they are trying to treat the patient who is the sickest.”

Ms Cronin said that ABF can help drive best clinical practice.

In these terms, Ms Cronin mentioned that the HSE National Director of Acute Hospitals Mr Liam Woods has established a clinical reference group, which is chaired by National Clinical Advisor and Group Lead, Acute Hospitals, Dr Colm Henry.

“We have a number of eminent clinicians as part of that group and we will continually bring proposals to them as this system develops,” she said.

“As an accountant, obviously I am not clinical, so I can’t make decisions about the direction of clinical practice. But one of the benefits of this system, and I presented on this at the Charter Day in the RCSI, is that once you break-up the block grant and you have a price and volume visibility, you can start to say, for example, ‘we are not willing to back that case as an inpatient case; we think that should be a day case. And over-time, we want you to reconfigure your hospital in such a way that you have a day case area, and that it is staffed differently to the overnight area.’ In that way, you start to drive work in line with best practice, using the funding model. That is our direction of travel — that is a five-to-seven year journey in parallel to these transition adjustments.”

Extending ABF into primary care is also an area currently being considered. Such a move would bring about the aim of money following patients rather than funding being allocated to the separate silos of primary and secondary care. Linking funding in this way is seen as an important part of integrating healthcare, which for too long has been fractured between hospital and community-based services.

The Department is working with the HSE to develop a community services costing programme. The mission of the programme is to develop a quality-driven approach to costing community services that delivers value by informing resource allocation and supporting improved patient outcomes.  The HSE has submitted proposals regarding a Strategic Framework for Community Costing and this is under consideration by the Department of Health.

There are plans to bring forward legislation to establish the HPO on a statutory basis in due course. This, however, would be subject to the Government’s priorities and the report produced by the Oireachtas Committee on the Future of HealthCare, according to the Department of Health. A further incremental step in the health reform process will be to develop policy on a healthcare commissioning model in the Irish context. To this end, the Department is in the process of carrying out research into international experiences of commissioning models, including engagement with the OECD and the European Observatory on Health Systems and Policies.

Staffing also remains a priority.

“We basically had a team from the ESRI for many years who were doing the clinical coding and they have come into the HSE,” according to Ms Cronin.

“They were managing it nationally with all the hospitals and we had a team who were doing pricing and they have joined with me. Now we have slowly begun to add to that team. In the first two years, there was only myself as the additional resource leading the planning phase. We have begun to put some resource in now, like an ABF accountant in each of the Hospital Groups. And we have put some IT people in… 2016 and clinical coders, but that has been slow.”

ABF will clearly take time to fully implement, but the process is well underway. With the majority of funding in the Irish hospital system now funded through ABF, the focus is on improving the quality of data and to ensure the distortions are not introduced into the health system so that the financing of hospitals is as fair and equitable as possible.

The 2017 Activity Based Funding Conference, ‘The Quality Agenda’, will take place in the Great Hall, Royal Hospital, Kilmainham, Dublin, on 11 May.

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