Global Hospital Budget Models May Help Curb Rising Hospital Prices

March 25, 2022 - Global hospital budget models with a volume adjustment system could help limit hospital spending growth for commercial payers and patients, according to an issue brief from the Commonwealth Fund.

Hospital prices for commercial health plans have been increasing since the early 2000s. Commercial prices were more than double the rate of Medicare prices in 2018. This high spending may be attributed to growing numbers of healthcare mergers and acquisitions and hospital consolidation, which have been shown to raise hospital prices without improving care quality.

To curb hospital price growth, industry leaders have suggested initiatives that promote competition, such as better price transparency and greater antitrust enforcement. However, these tactics do not directly address the market power accumulated by hospitals and providers.

Instead, policymakers have turned to the possibility of implementing a government-administered pricing system like a global hospital budget.

After reviewing published literature and analyses of past and current pricing systems, researchers determined that an all-payer hospital global budget—in which revenues are capped for a specified period for all services provided to patients—could help remove fee-for-service incentives and contain spending growth.

Initiatives like direct itemized pricing, rate update limits, and price caps for hospital and out-of-network services offer incentives for hospitals to control costs but still operate on a fee-for-service basis, the brief noted.

Hospitals under fee-for-service payment models with higher fixed costs—such as building and equipment expenses, administrative overhead, and stand-by staffing costs—benefit when patient volume increases as their reimbursement is dependent on the quantity of care they deliver.

“Under hospital all-payer global budgets, however, hospitals are not paid on a fee-for-service basis,” the brief stated. “Instead, hospitals are paid a prospectively determined amount for all inpatient and outpatient services provided to a patient population in a given year.”

The global budget expands the bundle of services that it covers and provides additional incentives for providers to manage patient volumes and costs within a budget constraint, the brief said.

Global budgets also encourage hospital investments in population health and community-based initiatives. The model includes incentives for hospitals to implement strategies for managing and coordinating care and improving overall patient health. The strategies can help reduce the number of individuals seeking care and therefore produce lower hospital costs.

The goals of hospital global budgets align with Medicare’s accountable care organization (ACO) program goals of improving care management and coordination, reducing unnecessary healthcare services, and improving population health.

In addition to providing hospitals with clear incentives to improve operating efficiency, global budgets guarantee a predictable revenue flow for hospitals, are well-suited for rural or isolated hospitals with solid patient populations, and can be applied to a group of hospitals that dominate a region, the brief stated.

Global budgets can also help control year-over-year hospital spending by regulating allowed annual budget updates and can be adjusted to reflect demographically driven changes in demand for hospital services.

Hospital global budgets in other countries tend to provide a fixed amount of funding for a specific period. However, the brief suggested that using a variable budget can help hospitals keep up with changing patient volumes.

The volume adjustment system flexes a budget up or down based upon a hospital’s variable costs and patient volume.

“In addition, these more flexible budget models accommodate patient flow from hospital to hospital, with revenue following the patients, consistent with market competition principles,” researchers wrote. “The methodology also can allow hospitals to maintain their revenues at levels sufficient to cover fixed costs should volumes decline.”

All-payer global hospital budget models may also succeed by including design elements like value-based incentive programs, coverage for non-hospital services such as home healthcare, and aggregate stop-loss provisions to limit financial risk and losses.

“Overall, global budgets can create the conditions necessary to hold hospitals accountable for the cost of services they provide while requiring a minimum of regulatory complexity to implement and enforce,” the brief concluded. “In addition, this payment approach can provide hospitals with a stable and predictable amount of annual revenue, facilitate more rational allocation of hospital resources, and provide hospitals with the financial flexibility necessary to meet the diverse and unique health needs of the communities they serve.”