by Sven Byl

Price regulation in healthcare

Players in the sector can learn essons from different price regulation models

There are lessons the SA healthcare sector can learn from international examples of price regulating.
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Price regulation and its implication for the South African healthcare sector was the topic of the September 18th session of KPMG’s Healthcare Dialogue series.
 
The session, presented by Professor Nigel Edwards, KPMG Director of Global Health Reform, explored the lessons various players in South Africa’s healthcare sector can learn from different models of price regulation around the world and provided compelling insights for payers (medical schemes and governments) and providers alike.
 
DRGs the major trend in payment systems
 
Globally, there is a widely held view that payers believe that providers are less efficient than they could be, while payers are viewed to be applying downward pressure on prices. The payment system is increasingly being used to tackle these issues, with Diagnostic Related Group (DRG) systems in particular being used more widely.
 
This includes countries such as Canada, Australia and the United States and middle income countries in Eastern Europe, South East Asia and Latin America. In South Africa, DRGs have also been used by some of the biggest players in the market as a payment method for hospitals. Many government are using DRGs  for budget setting.
 
Regarding regulating prices in healthcare, Edwards says, “The choice is not about whether you do it, it’s about who does it and how.” Price regulation has been driven in particular by what Edwards calls the “activist payer” – organisations that want to try to change the shape of their market.
 
Reasons for implementing price setting
 
Reasons for price setting include but are not limited to cost control, increasing data transparency, creating autonomous management, quality improvement and capacity management. 

“As with all policies, the more objectives you try to do at once, the less effective it is,” says Edwards, referring to the United Kingdom’s recent attempts to achieve all these objectives and more through price setting.However, he points out that countries trying to achieve only one or two objectives through price setting have seen more success.
 
In terms of what regulators can expect the results of implementation to be, Edwards says it depends on the starting point. 

As an example, he points out that systems in Europe that have switched from block budget systems to DRG-type systems have seen both increases in activity, which could be considered a negative outcome, as well as reductions in length of (hospital) stay, which could be seen as more positive.
 
While price setting can be used to address several challenges in healthcare, it cannot be viewed as the be-all-and-end-all solution. Micro-change needs to be effected through more precise strategies.
 
What this means for strategy
 
Controlling prices alone often leads to a number of undesirable consequences, such as increased volumes through reduction in admission thresholds, increased number of billable items per admission, big reductions in length of stay to control costs (resulting in failed discharges and readmission) and quality failures, particularly in areas where quality is hard to measure. In addition, bundled - and capitation payments can lead to slacking and cost shifting.
 
Realistic expectations and careful consideration of objectives are therefore important when considering a price regulation. To ensure health systems move from volume to value, Healthcare Information Technology (HIT), clinical integration, cost reduction, and ubiquitous performance measurement are key.
 
Edwards states that responding to this trend requires skills in strategy and execution. He expects that many markets will see more mergers and acquisition activity, in order to drive economies of scale, scope and skill.
 
The South African perspective
 
Delegates attending the session were asked to participate in a  poll at the end of the session. Asked what the best way is to bend the cost curve in healthcare, the audience voted 66% in favour that increased competition is preferable to price regulation – a sentiment supported by the international evidence presented.
 
The audience also indicated that they believed that price regulation could lead to rapid innovation in South Africa’s healthcare sector. In addition, audience members voted 88% ‘yes’ when asked whether price control would lead to unnecessary increase in volume.
 
Edwards cautioned that policy makers often have too-high expectations of what payment systems can be used to achieve. “It’s quite a powerful weapon,” he said, “but it’s blunt. It can’t be used to affect micro-change.”
 
 
Nigel Edwards – Biography
 
Nigel is the Director of Global Health Reform for KPMG.  He is recognised as an authority on health policy and delivery systems globally.  He is known for his original thinking and ability to communicate difficult concepts in an effective and accessible way to a wide range of audiences including national media, politicians, international audiences, clinicians and managers.  
 
He is currently a Senior Fellow, with the King’s Fund, an internationally recognised think tank and research institute. Nigel is an Honorary Visiting Professor at the London School of Hygiene and Tropical Medicine. He is on the editorial board of Health Services Research and a reviewer for BMJ, JHSR&P, JRSM and a number of other journals.  He is a member of an expert commission for the Office for Health Economics on Competition in Health Care.
 

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