Price setting and regulation in health services

PRICE SETTING AND REGULATION IN HEALTH SERVICES HEALTH FINANCING POLICY BRIEF NO. 7 Sarah L. Barber Luca Lorenzoni Tomáš Roubal © Copyright World Health OrganizaƟ on 2020 Some rights reserved. This work is available under the CreaƟ ve Commons AƩ ribuƟ on-NonCommercial- ShareAlike 3.0 IGO licence (CC BY-NC-SA 3.0 IGO; hƩ ps://creaƟ vecommons.org/licenses/by-nc-sa/ 3.0/ igo). Under the terms of this licence, you may copy, redistribute and adapt the work for non-commercial purposes, provided the work is appropriately cited, as indicated below. In any use of this work, there should be no suggesƟ on that WHO endorses any specifi c organizaƟ on, products or services. The use of the WHO logo is not permiƩ ed. If you adapt the work, then you must license your work under the same or equivalent CreaƟ ve Commons licence. 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The menƟ on of specifi c companies or of certain manufacturers’ products does not imply that they are endorsed or recommended by WHO in preference to others of a similar nature that are not menƟ oned. Errors and omissions excepted, the names of proprietary products are disƟ nguished by iniƟ al capital leƩ ers. All reasonable precauƟ ons have been taken by WHO to verify the informaƟ on contained in this publicaƟ on. However, the published material is being distributed without warranty of any kind, either expressed or implied. The responsibility for the interpretaƟ on and use of the material lies with the reader. In no event shall WHO be liable for damages arising from its use. The named authors alone are responsible for the views expressed in this publicaƟ on. Printed in Switzerland. Price seƫ ng and regulaƟ on in health services / Sarah L. Barber, Luca Lorenzoni, Tomáš Roubal. (Health Financing Policy Brief, No. 7) ISBN 978-92-4-000498-6 Key messages Acknowledgments 1. What constitutes price setting and regulation for health services? 2. Why is price setting for health services important in the context of UHC? 3. How does price setting and regulation fi t within health fi nancing policy? 4. What do we know about price setting and regulation for health services from theory and practice? 4.1. Individual negotiations 4.2. Collective negotiations 4.3. Unilateral price setting 4.4. Price adjustments and add on payments to incorporate providers’ exogenous differences in costs 4.5. Cost based pricing 4.6. Balance billing and fi nancial protection 4.7. Using price levels to control for volumes and aim for budget neutrality 4.8. Institutional entities for price setting and regulation 5. WHO’s perspective References 4 4 5 6 7 9 9 10 10 13 15 16 16 17 18 19 TABLE OF CONTENTS InformaƟ on in this brief relies on a previous WHO/OECD publicaƟ on by Barber, Lorenzoni, and Ong (2019a, 2019b). In preparing the earlier publicaƟ on, substanƟ ve technical input and detailed annexes were prepared by Jane Hall, Maryam Naghsh Nejad, Kees Van Gool, Michael Woods, Sue Nowak, Alberto Marino, Zeynep Or, Coralie Gandré, Jonas Schreyögg, Ricarda Milstein, Naoki Ikegami, Chiu Wan Ng, Soonman Kwon, Viroj Tangcharoensathien, Walaiporn Patcharanarumol, Taweesri Greetong, Waraporn Suwanwela, Nantawan Kesthom, Shaheda Viriyathorn, NaƩ adhanai Rajatanavin, Woranan WiƩ hayapipopsakul, Jain Nishant. From WHO, we thank Peter Cowley, Jon Cylus, Tamas Evetovits, Paul Ong, Liviu Vedrasco, Lluis Vinyals Torres. Inke Mathauer and Joe Kutzin provided valuable comments on this brief. The authors remain responsible for errors and omissions. We gratefully acknowledge fi nancial support from the Kobe Group, Japan. – With the increasing levels of public funding to health care, countries are taking strategic approaches in defi ning what services are purchased and paid for, and how to link payments with quality and performance.   – The price for health services is the amount that must be paid to elicit the supply and quality of health care services that society wishes to have and is willing to pay for. – The process or negoƟ aƟ on by which prices are determined can be grouped into three main methods: individual negoƟ aƟ ons between providers and purchasers, collecƟ ve negoƟ aƟ on between associaƟ ons of providers and purchasers, and unilateral decisions by purchasers. – CollecƟ ve and unilateral price seƫ ng eliminate price discriminaƟ on and have performed beƩ er in controlling the growth in health care costs. Both have the potenƟ al to improve quality beƩ er than individual negoƟ aƟ ons. A single or collecƟ ve purchaser also has the power to put some discipline into prices. – Price adjustments are typically made to ensure coverage and access, for example, to health care providers in rural and remote areas; those treaƟ ng disproporƟ onately high numbers of low-income or high-cost paƟ ents to ensure coverage and quality; and faciliƟ es providing medical educaƟ on. – Countries have eliminated balance billing as a means of fi nancial protecƟ on, in which providers are not permiƩ ed to charge paƟ ents more than the prices established for covered services. – Building insƟ tuƟ onal capacity for price seƫ ng and regulaƟ on can support the use of prices as policy instruments to aƩ ain broader health-related objecƟ ves, i.e., guarantee coverage and fi nancial protecƟ on, enhance quality and access, and increase effi ciency. ACKNOWLEDGMENTS Key Messages 4 HEALTH FINANCING POLICY BRIEF NO. 7 5The purpose of this brief is to explain health services price seƫ ng and regulaƟ on in the context of acceleraƟ ng progress towards universal health coverage (UHC). There is a special focus on the implicaƟ ons for middle-income seƫ ngs, where increases in public spending have been accompanied by new ways of purchasing, organizing, and delivering health care (Mathauer & WiƩ enbecher, 2013). This paper focuses on health services; price seƫ ng and regulaƟ on for goods, in parƟ cular, medicines and medical devices, follow diff erent approaches that are detailed elsewhere (WHO, 2015). Provider payment systems consist of one or more payment methods including prices and rules,1 regulaƟ ons, and supporƟ ng systems such as contracƟ ng and monitoring mechanisms. These systems create economic signals and incenƟ ves that infl uence behavior. Any payment method has three dimensions: the base upon which prices are defi ned and set; the process by which the price level is determined; and the price level per unit of payment (Reinhardt 2006, 2011, 2012). This paper focuses on the second and third dimensions and describes the processes by which price levels are determined. Price seƫ ng refers to an administraƟ ve process or negoƟ aƟ on by which prices are determined aŌ er the unit for payment is established (e.g., a general pracƟ Ɵ oner service, a day of care in a residenƟ al facility, or a case of hospitalizaƟ on). These processes can be grouped into three main methods (Reinhardt, 2012): • Individual negoƟ aƟ ons between providers and purchasers. • CollecƟ ve negoƟ aƟ on between associaƟ ons of providers and purchasers • Unilateral decisions by purchasers. From a societal perspecƟ ve, the price is the amount that must be paid to elicit the supply and quality of health care services that society wishes to have and is willing to pay for. Hence pricing supports broader health systems objecƟ ves, i.e., guarantee coverage and fi nancial protecƟ on, enhance access and quality, and increase effi ciency. Price regulaƟ ons usually aim at ensuring price transparency, seƫ ng price ceilings on commercial health plans, defi ning rules for out-of-network provider prices, and instrucƟ ng providers on condiƟ ons of billing within the legislaƟ ve framework for the health care sector.2 This paper focuses on balance billing in which providers are permiƩ ed to charge paƟ ents more than the price established for covered services, and limitaƟ ons imposed on balance billing that have been established in some seƫ ngs as a means of fi nancial protecƟ on. 1. WHAT CONSTITUTES PRICE SETTING AND REGULATION FOR HEALTH SERVICES? 1 A set of prices and rules used by a purchaser to pay a provider may also be referred to as “tariff ”. 2 This legislaƟ ve framework usually comprises a compeƟ Ɵ on, consumer and market authority. WHAT CONSTITUTES PRICE SETTING AND REGULATION FOR HEALTH SERVICES? Middle-income countries represent more than 70% of the world’s populaƟ on and a large share of the disease burden (World Bank, 2019). While increases in public spending on health are occurring across all countries, the share of public spending on health doubled between 2000 and 2016 in middle-income countries (WHO, 2018). With the increase in public spending on health, countries are paying more aƩ enƟ on to value for public spending on health, and the decisions about how to channel funding and organize services to respond to people’s needs. This is parƟ cularly true for inpaƟ ent services and curaƟ ve outpaƟ ent care, which accounts for 70% of total public spending on health on average globally (WHO, 2018). As health systems mature, policy decisions about the services covered, payments to providers, and the condiƟ ons for those payments become the determining factors in individual care-seeking behaviors (Getzen, 2006). Copayments can determine an individual’s decision about whether and which care to access; as such, policies about coverage, payments and prices thus support the progress towards UHC, especially in middle income countries. Given that health care is far from being a classic market for goods and services, the economic raƟ onale for seƫ ng prices is to control costs, foster compeƟ Ɵ on on quality, and miƟ gate against excessive fi nancial claims (Kumar et al., 2014) Policy intervenƟ ons are parƟ cularly important because health care markets are characterized by such failures as informaƟ on asymmetry and lack of informaƟ on on prices and quality that preclude consumer choice. For many commodiƟ es, consumers assess the price and value of goods; in health in developed countries, users have health insurance or access to public services and, consequently, they pay nothing or a relaƟ vely small co-payment when using health services. Users are also represented in the market by agents (health care pracƟ Ɵ oners) instead of operaƟ ng by themselves, and thus face informaƟ on asymmetry. These diff erences make consumers less sensiƟ ve to price signals. In addiƟ on, the price signals that connect purchasers and providers operate diff erently because prices are not formed directly by the interplay of demand and supply. 2. WHY IS PRICE SETTING FOR HEALTH SERVICES IMPORTANT IN THE CONTEXT OF UHC? 6 HEALTH FINANCING POLICY BRIEF NO. 7 Price seƫ ng and regulaƟ on for health services is a key component of strategic purchasing. It is linked with revenue raising, given that ulƟ mately the prices must be in line with the available resources. There are also associaƟ ons with pooling, i.e., price seƫ ng and regulaƟ on can be used to harmonize payment methods and rates across diff erent schemes or pools. Countries have aligned pricing policies with the broader goals of ensuring fi nancial protecƟ on, equitable distribuƟ on of resources according to health needs, promoƟ on of quality and public health objecƟ ves, as well as controlling the growth in health care expenditures and increase effi ciency (Table 1). 3. HOW DOES PRICE SETTING AND REGULATION FIT WITHIN HEALTH FINANCING POLICY? Table 1. Key health fi nancing policy issues and ways in which countries have aligned pricing and policy goals Policy issues Ways in which countries have aligned pricing with policy goals Revenue raising Ensuring that promised benefi ts do not exceed available revenues to avoid implicit raƟ oning and informal payments. Prices are set within the boundaries of available resources. Pooling Ensuring that pooling enables the equitable distribuƟ on of resources according to needs, and the provision of public health goods. Prices can be used to harmonize payment methods and rates across diff erent schemes or pools, and strengthen cross subsidizaƟ on across risk pools. Price diff erences across pools can, on the other hand, worsen the fragmentaƟ on and increase inequity across pools and their members. Purchasing Purchasing arrangements and payment methods should be aligned with broader service delivery objecƟ ves. Prices are set at appropriate levels so as not to off set incenƟ ves in payment mechanisms. In example, prices for capitaƟ on payments must be at the appropriate level to avoid the provision of low quality care, provider selecƟ on of healthier paƟ ents, or referral of complex cases that require a higher intensity of services to another service provider. Similarly, fee for service payments should be priced to avoid provider incenƟ ves to increase volumes by providing addiƟ onal (unnecessary) services. Balance billing (in which providers charge higher than the regulated prices) can be prohibited to promote fi nancial protecƟ on. 7HOW DOES PRICE SETTING AND REGULATION FIT WITHIN HEALTH FINANCING POLICY? Table 1 (cont.) Policy issues Ways in which countries have aligned pricing with policy goals Purchasing Purchasing arrangements and payment methods should be aligned with broader service delivery objecƟ ves. Price adjustments are typically made to ensure coverage and access, for example, to health care providers in rural and remote areas; those treaƟ ng disproporƟ onately high numbers of low-income or high-cost paƟ ents to ensure coverage and quality; and for faciliƟ es providing medical educaƟ on. Price schedules enable purchasing services from the private health care sector and provide benchmarks for negoƟ aƟ ons between private purchasers and health care providers. Financial management Limits are established on total annual health spending. Countries have used unilateral administraƟ ve price seƫ ng or collecƟ ve negoƟ aƟ on in conjuncƟ on with other instruments such as expenditure caps to control growth in health care spending. 8 HEALTH FINANCING POLICY BRIEF NO. 7 Under individual negoƟ aƟ ons, prices are agreed upon through negoƟ aƟ ons between an individual purchaser, such as a health insurer or health coverage scheme, and an individual provider of health care services. There are several key features of individual negoƟ aƟ ons. Like the negoƟ aƟ on of any good, prices refl ect the parƟ es’ respecƟ ve bargaining posiƟ ons. Under individual negoƟ aƟ ons, a concentraƟ on of purchasers and providers with stronger market power will have equally strong bargaining power. In theory, if a purchaser covers a large share of the populaƟ on, benefi ciaries can be guided to use “in-network” providers with which it contracts. Under such a system, providers may agree to accept relaƟ vely lower prices from the purchaser to ensure paƟ ent volume and capture guaranteed revenue. However, in pracƟ ce, providers with good reputaƟ ons or brands, specialized services, or those represenƟ ng the largest or sole provider in the region have strong leverage to demand higher prices from purchasers and can control price changes over Ɵ me (Baker et al., 2014; Berenson et al., 2015). Under individual negoƟ aƟ ons, there will be price discriminaƟ on, in which idenƟ cal services can be purchased by diff erent purchasers at diff erent prices. An example of individual price negoƟ aƟ on is the United States of America (US) private health care market, characterized by variaƟ ons in prices for the same services that bear liƩ le relaƟ on to the cost of providing those services, its quality or paƟ ent severity (Commonwealth of MassachuseƩ s, 2017). In addiƟ on, administraƟ ve costs are high because individual negoƟ aƟ ons with mulƟ ple purchasers are associated with higher expenditures on health insurance markeƟ ng and administraƟ on, negoƟ aƟ on Ɵ me, claims assessment and other billing acƟ viƟ es. The process by which prices are determined can be grouped into three approaches: • Individual negoƟ aƟ ons between providers and purchasers. • CollecƟ ve negoƟ aƟ on between associaƟ ons of providers and purchasers. • Unilateral decision by purchasers. Regardless of the approach used, there is an assumpƟ on that providers have the ability to respond to fi nancial incenƟ ves. We assume, therefore, that provider costs are not exogenous; in other words, providers exercise a degree of control over their costs and do not operate under a fi xed cost structure. 4. WHAT DO WE KNOW ABOUT PRICE SETTING AND REGULATION FOR HEALTH SERVICES FROM THEORY AND PRACTICE? 4.1. INDIVIDUAL NEGOTIATIONS 9WHAT DO WE KNOW ABOUT PRICE SETTING AND REGULATION FOR HEALTH SERVICES FROM THEORY AND PRACTICE? Under collecƟ ve negoƟ aƟ ons, a naƟ onal purchasing agency or an associaƟ on of purchasers (i.e., health insurers) negoƟ ate with associaƟ ons of hospitals or health providers. The outcome of these negoƟ aƟ ons would typically be a uniform fee schedule that would apply to all purchasers and providers. Wide diff erences exist in the levels of negoƟ aƟ on. For hospital services across OECD countries, prices are established through collecƟ ve negoƟ aƟ ons at central level (e.g., Australia, France, Greece, Hungary, Japan, Korea, Austria, Belgium, and Turkey; or local level (e.g., Finland, Spain, Sweden, Canada, Switzerland). In Germany, Denmark, Italy, and Poland, diagnosis-related group (DRG) weights are centrally defi ned and rates are set at local level (Paris, Devaux & Wei, 2010). There are several key features of collecƟ ve negoƟ aƟ ons. Price discriminaƟ on present in individual negoƟ aƟ ons is eliminated, given that an idenƟ cal service is purchased at the same price. CollecƟ ve negoƟ aƟ ons also face much lower administraƟ ve costs in comparison with individual negoƟ aƟ ons, given that substanƟ ally fewer resources are dedicated negoƟ aƟ ons with purchasers. At the same Ɵ me, the level of confl ict among the diff erent stakeholder groups parƟ cipaƟ ng in the negoƟ aƟ on may increase as the space and the scope of negoƟ aƟ ons widens. The process refl ects in many cases the strength of a country’s domesƟ c insƟ tuƟ ons and associaƟ ons. RepresentaƟ ves of provider associaƟ ons must have the mandate to negoƟ ate – whether legal or explicitly expressed by their respecƟ ve associaƟ on. The degree of bargaining power of the diff erent professional associaƟ ons may result in lower prices and payment for those with weaker infl uence. In addiƟ on, compeƟ Ɵ on policy and legislaƟ on has bearing on the ability to engage in collecƟ ve negoƟ aƟ ons. The methods and processes may be subject to compeƟ Ɵ on laws and regulaƟ ons, depending on whether health price negoƟ aƟ on is considered an economic acƟ vity or conducted in the interest of social welfare. CompeƟ Ɵ on law in the European Union recognizes that doctors and hospitals are economic enƟ Ɵ es within a market, but that public health purchasers have a social purpose (Kumar et al., 2014). Therefore price negoƟ aƟ ons for health prices are permiƩ ed. The third method of determining price levels is unilateral administraƟ ve price seƫ ng by a purchaser. When prices are administered, a form of yardsƟ ck compeƟ Ɵ on rewards a given fi rm depending on its standing vis-a-vis an exogenous benchmarking independent of the costs incurred by each provider. For example, a purchaser could choose to reimburse hospitals at the average costs of producƟ on per unit of service observed across a set of providers. By doing so, this gives incenƟ ves to higher-cost providers to improve effi ciency and reduce their costs. At the same Ɵ me, providers with below- average costs have incenƟ ves to keep costs below the benchmark to retain the marginal diff erence. Where prices are set unilaterally by a purchaser, providers can compete on quality rather than price to aƩ ract consumers and increase volumes. As such, pressures to reduce costs could result in effi ciency gains rather than reduced quality. Fixed price systems also allow transferring the fi nancial risk linked to service provision from the purchaser to the provider. 4.2. COLLECTIVE NEGOTIATIONS 4.3. UNILATERAL PRICE SETTING 10 HEALTH FINANCING POLICY BRIEF NO. 7 Table 2. Process of price seƫ ng, advantages, disadvantages, key requirements, and country examples Advantages Disadvantages InsƟ tuƟ onal requirements Country examples for hospital services Individual negoƟ aƟ ons between providers and purchasers In theory, purchasers can accept lower prices from designated providers to ensure paƟ ent volume and capture guaranteed revenue. May allow more fl exibility in adapƟ ng services to paƟ ent’s preferences. Providers with good reputaƟ ons, specialized services, or sole providers can negoƟ ate higher prices and control price changes. Price discriminaƟ on exists in which diff erent payers pay diff erent prices for the same services. No price transparency exists. AdministraƟ ve costs can be high because of expenditures on health insurance markeƟ ng and administraƟ on, negoƟ aƟ on Ɵ me, and billing acƟ viƟ es linked to mulƟ ple purchasers. High administraƟ ve capaciƟ es and expenditures for markeƟ ng, billing, and claims assessment. US private insurers, private for-profi t hospitals in Thailand and Mexico, specialist services in South Africa. CollecƟ ve negoƟ aƟ ons between associaƟ ons of providers and purchasers Price discriminaƟ on is eliminated, given that an idenƟ cal service is purchased at the same price. Strong ability to use prices as policy instruments for public health objecƟ ves. Allows purchasers to exert market power and refl ect the overall budget and fi scal aff ordability of the health sector and thus limit price increases. RelaƟ vely lower administraƟ ve costs in comparison with individual negoƟ aƟ ons. Prices are transparent to providers and public. Price levels may refl ect diff ering bargaining power among professional associaƟ ons. PotenƟ al for confl ict among the diff erent stakeholder groups parƟ cipaƟ ng in negoƟ aƟ ons. Methods and processes may be subject to compeƟ Ɵ on policy and legislaƟ on, and limit applicaƟ on to private health care sector. Requires strong health informaƟ on systems and human resource capaciƟ es. Where cost-based, requires reliable detailed cost data from providers. InsƟ tuƟ onalized transparent and formalized process required for negoƟ aƟ ons. Organized professional associaƟ ons with capacity and mandate to negoƟ ate. For hospital services, collecƟ ve negoƟ aƟ ons at central level undertaken in Australia, France, Greece, Hungary, Japan, Korea, Austria, Belgium, and Turkey; or local level in Finland, Spain, Sweden, Canada, Switzerland. In Germany, Denmark, Italy, and Poland, DRG weights are centrally defi ned and rates are set at local level. 11WHAT DO WE KNOW ABOUT PRICE SETTING AND REGULATION FOR HEALTH SERVICES FROM THEORY AND PRACTICE? A comparison of the three approaches is summarized in Table 2. Like collecƟ ve negoƟ aƟ ons, the unilateral administraƟ ve method eliminates price discriminaƟ on, given that a fi xed price is established. In comparison with individual negoƟ aƟ ons, unilateral administraƟ ve price seƫ ng incurs lower administraƟ ve costs by insurers and health systems, but addiƟ onal regulatory expenses may apply (Anderson & Herring, 2014). Moreover, system investments are needed to ensure that the process under unilateral price seƫ ng is transparent and promotes trust and confi dence in the results. In terms of controlling price levels, the process of collecƟ ve negoƟ aƟ ons allows purchasers to exert market power vis- a-vis providers and their groups, refl ect the overall budget and fi scal aff ordability Advantages Disadvantages InsƟ tuƟ onal requirements Country examples for hospital services Unilateral decisions by purchasers Provides incenƟ ves for higher-cost providers to improve effi ciency. Price discriminaƟ on is eliminated, given that an idenƟ cal service is purchased at the same price. Price schedules generated can be used as a public health good in providing benchmarks for private insurers. Strong ability to use prices as policy instruments for public health objecƟ ves, i.e., through add on payments or other price adjustments. Strong ability for purchasers to exert market power and refl ect the overall budget and fi scal aff ordability of the health sector and thus limit price increases. RelaƟ vely lower administraƟ ve costs in comparison with individual negoƟ aƟ ons. Prices are transparent to providers and public. May reduce paƟ ent choice. Where cost-based, requires reliable informaƟ on from providers regarding costs, volumes, and outcomes. Requires strong health informaƟ on systems and human resource capaciƟ es. InsƟ tuƟ onalized transparent process in seƫ ng prices applicable to all providers. Requires regular updaƟ ng to encourage innovaƟ ons. For hospital services under the US Medicare and Medicaid programs, Australia, Ireland, Norway. Table 2 (cont.) 12 HEALTH FINANCING POLICY BRIEF NO. 7 Price adjustments and add-on payments are common when prices are set unilaterally or negoƟ ated collecƟ vely, to ensure that specifi c services or caring for specifi c populaƟ ons are covered, parƟ cularly where there are addiƟ onal costs of providing care or it is considered unprofi table. In this manner, pricing can be an important tool in allocaƟ ng resources to where they are most needed. 4.4. PRICE ADJUSTMENTS AND ADD ON PAYMENTS TO INCORPORATE PROVIDERS’ EXOGENOUS DIFFERENCES IN COSTS of the health sector, and thus limit price increases. They also usually impose some overall expenditure controls (i.e., volume controls). This ability is even stronger in case of unilateral administraƟ ve price seƫ ng. Evidence (primarily from the US) suggests that, where properly structured and evaluated, unilateral price seƫ ng by a purchaser performed beƩ er in reducing cost growth in comparison with market-based systems (Anderson, 1991, Atkinson, 2009; Sommers, White & Ginsburg, 2012; Murray & Berenson, 2015, Anderson et al., 2019). From an internaƟ onal perspecƟ ve, the comparaƟ ve price level index for hospital services is lower in France where 83% of revenues are based on negoƟ ated prices set within an overall budget envelope as compared with the US (Lorenzoni & Koechlin, 2017). In the hospital sector, evidence is mixed as to whether compeƟ Ɵ on for quality is more likely to occur in markets with fi xed prices (Allen, Fichera & SuƩ on, 2016; Anderson, 1991; Gaynor, Moreno-Serra & Propper, 2013; Gaynor & Town, 2011). Table 3.Price adjustments and add on payments to incorporate providers’ exogenous diff erences in costs Country Geographic adjustments Outlier payments Public health goods Australia Adjustments made for approximately 400 hospitals serving small, rural or remote populaƟ ons, based on size, locaƟ on and type of services. Adjustments are made for outliers, with long-stays receiving a per diem rate. For populaƟ on based services that are not described in terms of acƟ vity, block funding is directed to states and territories to allocate to the hospitals. England Costs are mulƟ plied by naƟ onally determined by a market forces factor (MFF), which is unique to each provider and refl ects relaƟ ve costs of care across the country, with London providers aƩ racƟ ng the largest MFF. Adjustments are made for long or short stays and specialized services. Adjustments are made to support specifi c policy goals such as providing care compliant with best pracƟ ces. 13WHAT DO WE KNOW ABOUT PRICE SETTING AND REGULATION FOR HEALTH SERVICES FROM THEORY AND PRACTICE? Table 3 (cont.) Country Geographic adjustments Outlier payments Public health goods France Geographic adjustment is made only for Parisian area (Ile-de-France) and for overseas territories. Adjustments are made both for long and very short stays and specialized services. Add-on payments are made for medical educaƟ on, research, investments for improving quality of care and for supporƟ ng local public policy goals such as providing prevenƟ on, out-reach for precarious populaƟ ons, etc. Germany Recently, the government has iniƟ ated add-on payments to hospitals if they are located in fi nancially unaƩ racƟ ve regions, but are vital to medical services to the region. Since 2018, 205 add-on payments were made for paƟ ents with high needs for nursing care or the provision of addiƟ onal services and pharmaceuƟ cals which are not included in the DRG system yet. Add-on payments are made for medical educaƟ on, specialized units and medical centers or the delivery of care to medically demanding paƟ ents. Japan None. Adjustments are made for long stays. None. Public health goods are funded from diff erent sources (i.e., screening by health plans directly contracƟ ng providers, public health and immunizaƟ on by direct gov’t funding and user charges). Thailand (UCS) Adjustments are made for districts having higher unit costs due to sparse populaƟ on such as mountainous areas or island districts to ensures adequate funding for operaƟ ons. No adjustment of outliers. No adjustments; such services are mostly funded by the Ministry of Public Health. United States (Medicare) Medicare Wage Index accounts for local market condiƟ ons, by adjusƟ ng naƟ onal base payment rates to refl ect the relaƟ ve input-price level in the local market. Outlier payments are added for cases that are extraordinarily costly. OperaƟ ng and capital payment rates are increased for faciliƟ es that operate an approved resident training program (on the basis of hospital’s teaching intensity) or that treat a disproporƟ onate share of low- income paƟ ents. 14 HEALTH FINANCING POLICY BRIEF NO. 7 Table 3 (cont.) Country Geographic adjustments Outlier payments Public health goods United States (Medicaid) Physicians receive 10% bonus payments for providing services in areas facing health professional shortages. 18 states make adjustments for variaƟ ons in input costs across geographic regions. 48 states adjust for cases that are extraordinarily costly. AddiƟ onal payments are made to disproporƟ onate share hospitals that serve Medicaid paƟ ents and the uninsured. Supplemental payments are made that comprise the diff erence between Medicaid payments and the maximum allowable upper payment limit. Uncompensated care pool payments cover Medicaid shorƞ alls. Some states apply adjustments by category of hospitals (i.e., small in scale, teaching centers, children’s hospitals). Geographical price adjustments are made to ensure that health faciliƟ es are adequately reimbursed and compensated for factors outside their control. Adjustments are also made for goods that broadly benefi t society and communiƟ es, such as medical educaƟ on and public health acƟ viƟ es. In some seƫ ngs, prices are adjusted to account for acƟ viƟ es related to educaƟ on, research, and innovaƟ on as well as naƟ onal prioriƟ es including certain categories of medical treatment (Table 3). Where prices are cost-based, the costs per unit of service, economies of scale and scope, high entry and capital costs and marginal benefi ts of quality should be factored in to pay providers a fair and equitable price. Cost-based prices should refl ect the costs that a reasonably effi cient provider incurs in supplying services at the quality expected by the purchaser, while at the same Ɵ me recognising the legiƟ mate and unavoidable costs faced by some providers. To esƟ mate costs, purchasers use diff erent data sources and cosƟ ng methodology to structure the informaƟ on collecƟ on systems and verifi caƟ on. The process of acƟ vity and data cost collecƟ on varies widely across seƫ ngs in terms of the scope of the exercise, grouping of clinical condiƟ ons, defi niƟ on of costs for inclusion and exclusion, sample sizes and frequency of data collecƟ on. In Thailand, micro cosƟ ng data is being used to establish actual costs (Khiaocharoen et al., 2011). In some cases, such as independent physicians’ pracƟ ces in the US, the fee schedule is based on relaƟ ve resources needed to provide each service because there is no dataset of costs for physicians’ pracƟ ces. In other cases, such as the Republic of Korea (Korea), the availability and reliability of cost data is a key challenge as most providers are private and reluctant to provide detailed informaƟ on on their fi nancial condiƟ ons. Well-developed health informaƟ on systems, human resource capacity and ready access to reliable data are prerequisites for eff ecƟ ve use of cost-based payment systems by regulators (Özalƨ n & Cashin, 2014). 4.5. COST-BASED PRICING 15WHAT DO WE KNOW ABOUT PRICE SETTING AND REGULATION FOR HEALTH SERVICES FROM THEORY AND PRACTICE? Diff erent policy approaches – ranging from allowing specialists to charge higher prices (e.g., France) to regulaƟ ng the co-payments users face (e.g., Japan and Korea) – infl uence the level of household out-of-pocket expenditure and access to care. A key policy quesƟ on is whether the prices set are binding for providers or whether the providers are permiƩ ed to charge paƟ ents more than the price set for covered services. Whether or not prices cover the full cost of a service is an important policy lever that infl uences the aff ordability of health care services to individuals (Kumar et al., 2014). Balance billing means that health care providers charge paƟ ents for amounts higher than the fi xed or negoƟ ated prices, and the paƟ ent must pay the diff erence. Where balance billing is not prohibited, some groups of paƟ ents may face addiƟ onal out-of-pocket fees. The policy of fully reimbursing prices set infl uences the aff ordability of health care services to individuals. In the US, for example, it is common that balance billing occurs when paƟ ents are billed for services provided by providers outside of their insurance network (Lucia et al., 2017). In some seƫ ngs (e.g., Japan, Malaysia, Republic of Korea, Thailand, Germany, and the USA Medicare program for parƟ cipaƟ ng providers), balance billing is prohibited to increase aff ordability and ensure fi nancial protecƟ on. Prices are also infl uenced by the budget envelope. Expenditure ceilings have been used to link prices to the overall budget and redistribute resources for health among various providers. In some seƫ ngs, overall growth in health care spending is constrained by using macro-economic metrics, e.g., economic growth rates, expected payroll increases, infl aƟ on rates, increases in health care uƟ lizaƟ on, and populaƟ on growth and ageing (Reinhardt, 2012). For example, in France, for high volume and fast-growing DRGs (i.e., knee prosthesis and cataract surgery), the Ministry sets a threshold based on the growth rate for that acƟ vity naƟ onally. If the hospital’s caseload grows faster than the threshold, the price is reduced by 20% (Or & GandréI, 2019). In Germany, a hospital’s budget is linked to changes in the volume of services thereby limiƟ ng strong fl uctuaƟ ons in the overall budget from year to year. DeducƟ ons are used to incenƟ vize hospitals to remain within the negoƟ ated budget. If a hospital performs more services than agreed upon, it receives only 35% of the reimbursement rate; if a hospital performs fewer services than negoƟ ated, it receives a reimbursement of 20% for the services it should have theoreƟ cally performed (Schreyögg & Milstein 2019). In Japan, the Prime Minister establishes the global revision rate, or the de facto global budget for health expenditures based on an evaluaƟ on of the poliƟ cal and economic situaƟ on. Factors considered 4.6. BALANCE BILLING AND FINANCIAL PROTECTION 4.7. USING PRICE LEVELS TO CONTROL FOR VOLUMES AND AIM FOR BUDGET NEUTRALITY 16 HEALTH FINANCING POLICY BRIEF NO. 7 In recogniƟ on of its complexity, many countries have established or designated specifi c enƟ Ɵ es to carry out price seƫ ng and regulaƟ on (Barber, Lorenzoni & Ong, 2019b). In some seƫ ngs (e.g., England, Japan, Republic of Korea, Thailand), the tasks for price seƫ ng and regulaƟ on have been under the responsibiliƟ es of the relevant government ministry. The benefi ts of this approach are strong linkages among the diff erent levels of care and the close alignment between pricing policies and government objecƟ ves. In other seƫ ngs, independent agencies were established with the responsibility for developing and updaƟ ng hospital prices and fee schedules. This has occurred in Australia, France, Germany, and the state of Maryland in the US, for example. The mandate of these agencies is to develop a credible price schedule for hospitals, including grouping services based on their complexity, taking into consideraƟ on the available health resources, burden of disease, and clinical protocols and pathways. CharacterisƟ cs of successful systems include poliƟ cal independence, formal systems of communicaƟ on with stakeholders, credibility in the eyes of the public, freedom from confl icts of interest, and poliƟ cal standing to resist both industry capture and poliƟ cal pressures. In some cases, such as Germany, these enƟ Ɵ es have independent sources of funding that are separate from general revenues. A balance must be found between maintaining dialogue with stakeholders, including the health industry, while also observing objecƟ vity and independence. To address this challenge, formal consultaƟ on processes have been implemented that involve stakeholders in the discussion of the base price and the cost elements that it covers. Feedback from health care providers involved in care provision may ensure acceptability of the regulated prices. 4.8. INSTITUTIONAL ENTITIES FOR PRICE SETTING AND REGULATION include informaƟ on from the survey of pharmaceuƟ cal prices and data about the revenues and expenditures in health care faciliƟ es. Subsequently a line-by-line revision of the fee schedule is undertaken based on the global budget constraint and changes in volume and prices. The government contains expenditure increases by lowering the fees for items that have had rapid increases in volume and/or can be delivered at lower costs by providers. For example, physician fees for an iniƟ al visit are four-Ɵ mes higher than for a repeat visit (Ikegami, 2019). 17WHAT DO WE KNOW ABOUT PRICE SETTING AND REGULATION FOR HEALTH SERVICES FROM THEORY AND PRACTICE? Experiences in price seƫ ng and regulaƟ on in middle- and high-income seƫ ngs provide lessons learned relevant for all countries in their strategic purchasing. The main objecƟ ve of pricing in the context of strategic purchasing is to change provider behavior. Price seƫ ng may be parƟ cularly relevant for low- and middle-income seƫ ngs that are increasing their public funding to health and looking to other seƫ ngs for useful experiences. In this paper, we introduce the approaches to price seƫ ng in diff erent countries, and how countries have used prices to send signals to health care providers and align their behaviors with policy objecƟ ves, such as coverage and fi nancial protecƟ on. Among the three approaches to price seƫ ng, both collecƟ ve negoƟ aƟ ons and unilateral price seƫ ng have several key advantages, including eliminaƟ ng price discriminaƟ on. Countries have used both approaches as policy levers to drive provider behaviors and promote fi scal aff ordability. Under both approaches, price adjustments can be made to provide addiƟ onal resources for health faciliƟ es that serve low-income individuals and communiƟ es, thereby ensuring a more equitable distribuƟ on of health resources and beƩ er coverage. Transparency is higher in such systems. Many countries have shiŌ ed towards cost-based pricing. Where prices are cost- based (average or marginal) or normaƟ ve (effi cient), both collecƟ ve negoƟ aƟ on and unilateral price seƫ ng require informaƟ on about input costs, output volumes, and outcomes. This usually implies investments in health informaƟ on systems, human resource capacity for data collecƟ on and analysis, and ready access to reliable data. In several seƫ ngs, reforms have been implemented alongside investments in data collecƟ on and analysis needed to monitor progress. Where prices are not cost-based, evidence is needed to jusƟ fy prices as fair. As such, low- and middle-income seƫ ngs can iniƟ ate payment reforms and, in doing so, build criƟ cal capaciƟ es in health informaƟ on systems and data collecƟ on. Both collecƟ ve negoƟ aƟ ons and unilateral price seƫ ng require insƟ tuƟ onalized, accountable and transparent processes for seƫ ng prices or negoƟ aƟ ng them. This requires clear understanding among providers and purchasers about the rules and processes for price seƫ ng, and that such processes are done in a transparent, equitable and fair manner within the legislaƟ ve framework for the health care sector. In several seƫ ngs, specialized enƟ Ɵ es have been established to separate the technical task of determining costs from the more poliƟ cal exercise of negoƟ aƟ ng how much to pay for services. In some cases, data are commissioned or collected to esƟ mate the cost of providing services upon which prices are then based. CharacterisƟ cs of such systems include poliƟ cal independence, formal systems of communicaƟ on with stakeholders, and freedom from confl icts of interests, and fl exibility to adjust prices in response to both provider behaviors and external factors such as changes in market structure, and legiƟ mate and unavoidable costs faced by some providers. UlƟ mately, pricing is not only about covering costs but also providing the right incenƟ ves. Countries should fully use pricing as another key instrument to drive broader health system objecƟ ves. 5. WHO’S PERSPECTIVE 18 HEALTH FINANCING POLICY BRIEF NO. 7 REFERENCES Allen T, Fichera E, SuƩ on M. Can payers use prices to improve quality? Evidence from English hospitals. Health Economics. 2016; 25: 56-70. hƩ ps://doi.org/10.1002/hec.3121 Anderson GF. All-payer rate seƫ ng: down but not out. 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